Lending Club 2012 in Review, Part I: Loan Volume and Amount Funded

Happy New Year to all my readers and to lenders on Lending Club platform. As Peter mentioned in his post In 2012 U.S. P2P Lenders Issue $871 Million in New Loans, Lending Club had terrific 2012.

Loan Volume

In 2012, Lending Club issued 53,367 loans, more than double the number of loans issued (21,721) in 2011. On monthly basis, in recent months the number of loans issued seem to be reaching plateau of little over 6,000 loans.

Lending Club 2012 Monthly Loan Volume

In 2012, over 90% of loans issued were of higher quality with credit grade of A, B, C, and D. Only 8.92% of loans (4,761 loans) were issued with credit grade E, F and G. In comparison, Lending Club issued 12.26% of loans with credit grade E, F, and G in 2011. Lending Club continues to show commitment toward improving listing of higher quality loans on its platform.

Lending Club Loan Volume by Credit Grade 2010 - 2012

As Lending Club announced in its blog post Investor Updates and Enhancements, beginning October 2012, LC started to reserve some loans for institutional and other investors who wanted to fully fund loans themselves. Since then percentage of loans offered initially as Whole on monthly basis is continuing to increase. In October 2012, only 13.51% of loans were initially offered as Whole and that ratio more than doubled to 29.10% by December. Overall in Quarter 4, 20.85% of loans were initially offered as Whole.

I will recommend lenders, who would like to filter loans using initial list status as criteria, to consider using PeerCube filters. PeerCube now enables users to filter loans using 41 different loan and borrower attributes including Initial List Status.

Lending Club 2012 Loan Volume by Initial List Status

As I expressed concerns in my blog post Lending Club Loan Length and Default Rate about excessive 60 month term loans in 2011, it appears that the share of 60 month term loans in 2012 dropped to 18.55% of total loans issued, almost half of the 35.08% share in 2011.

Lending Club Loan Volume by Loan Term, 2010 - 2012

Loan Amount

Lending Club lenders funded $718 million in loans issued in 2012. This amount is over two-and-a-half times more than $257 million funded in 2011. As mentioned earlier, while the number of loans issued in last four months of 2012 stagnated, the amount funded continued to rise in the same period.

Lending Club 2012 Loan Amount Funded

The stagnant number of loans but higher loan amount funded in last quarter of 2012 indicates that most likely the amount funded per loan was much higher than loans issued prior to last quarter. In fact, on average $14,100 was lent per loan in last quarter, almost 10% increase from previous quarter. This also reverses the declining trend in average amount funded per loan for past three quarters.

Lending Club 2012 Average Amount Funded per Loan

While only 8.92% of loans with credit grade E, F, and G were issued in 2012, such loans received 15.29% of the funding. The funding for such loans was slightly lower compared to 18.74% in 2011.

Lending Club Total Amount Funded by Credit Grade, 2010 - 2012

The small reduction in funding for lower quality E, F, and G grade loans doesn't match the significant reduction in number of such loans issued in 2012. The average amount per loan increased across all credit grades but the increase in average amount was much higher for loans with credit grade E, F, and G.

Lending Club Average Amount per Loan by Credit Grade, 2010 - 2012

Going forward, I am particularly interested in monitoring Initial Listing Status and how it impacts retail lenders like myself. I was surprised to see that the percentage of total amount funded for Whole loans is almost same as the percentage of loans initially listed as Whole loans. With such a short duration since initial listing status went into effect, it is difficult to make any significant observations.

Lending Club Total Amount Funded by Initial Listing Status

Lending Club Average Loan Amount by Initial Listing Status

Similar to decrease in number of loans with 60 month term, the percentage of total amount funded in 60 month term loans also decreased from 48.50% in 2011 to 29.39% in 2012. Still, over $200 million were contributed toward 60 month term loans in 2012, almost 70% increase from 2011.

Lending Club Total Amount Funded by Loan Length

The average amount funded per loan significantly increased (by almost 30%) for 60 month term loans from $16,382 in 2011 to $21,246 in 2012. Similar increase (by almost 25%) is observed for 36 month term loans.

Lending Club Average Loan Amount by Loan Length

Lending Club had spectacular year 2012 as observed by total amount funded. There is significant increase in larger loans issued last year. I expect the growth in 2013 to be driven by loans of larger amounts rather than increase in number of loans listed on LC platform.

Lending Club Borrower's Home Ownership and Loan Characteristics, Part II

Continuing the review of loan characteristics as a function of home ownership status of borrower from previous post ...

Interest Rate

The chart below shows the average interest rate of loans issued between 2007 and 2012 YTD as a function of borrower's home ownership status. Due to very small volume of loans issued to borrowers who claimed home ownership as Any or None, those loans are removed from this chart. The average interest rate is an arithmetic equal-weighted average and not loan amount-weighted average.

The average interest rate is slightly higher for borrowers who rent homes compared to their counterparts who carry mortgage on their homes. This pattern has been quite consistent year over year. The reason for the slightly higher average interest rate may be due to lower FICO scores and shorter credit history because borrowers who rent home are likely to be younger and with limited credit history.

Similarly, the average interest rate is slightly lower for borrowers who own homes compared to borrowers who carry mortgage, loans issued in 2009 being the exception. The reason may be due to long credit history and higher FICO scores because borrowers who outright own homes are likely to be older and with decent credit history.

Lending Club Borrower's Home Ownership and Average Interest Rate

To confirm the assumptions, I decided to chart the average credit age at the time of issue of loan with the home ownership status of borrowers as shown below. Sure enough, the average credit age of borrowers who have mortgage on their homes is significantly and consistently greater than their counterparts who rent home. For example, in 2012 YTD, the credit age for borrowers who have mortgage is 15.8 years versus 12.6 years for their counterparts who rent. But there is no such relation between the borrowers who outright own their homes and credit age.

Lending Club Borrower's Home Ownership and Average Credit Age

Next I decided to chart the composition of home ownership status for each FICO score range of borrowers. It's clear that the lower FICO range are dominated by borrowers who rent and higher FICO score range by borrowers who have mortgage. For example, 56.1% of borrowers with FICO score between 660 and 664 rent their homes while only 19.75% of borrowers with FICO score between 800 and 804 rent their homes.

Lending Club Borrower's Home Ownership and FICO Range

Both Credit Age and FICO Range appear to offer a reasonable explanation for average interest rate to be slightly higher for borrowers who are renters. It is also not surprising considering that FICO Range is a key component of calculations used by Lending Club in setting Interest Rate for a loan.

Loan Length

The chart below shows the percentage of 36 months and 60 months loans issued between 2010 and 2012 YTD to borrowers as a function of their home ownership status. Prior to 2010, Lending Club issued loans with 36 months term only thus the data prior to 2010 is excluded from this analysis.

The borrowers who carry mortgage on their home are more likely to request loans with longer terms compared to their counterparts who own outright or rent their homes. In 2012 YTD, 23.60% of borrowers with mortgage received loans of 60 months term. In comparison, only 13.4% of borrowers who rent home received loans of 60 months term. This pattern is very consistent since Lending Club started issuing loans with both 36 and 60 months term.

A likely reason could be the management of debt repayment load. The 60 months loan will have lower monthly payment compared to 36 months loan of the same amount and interest rate. Typically, mortgage holders already have high debt payment burden, i.e. high debt-to-income ratio; thus, they may prefer smaller monthly payments and longer term loans.

Lending Club Borrower's Home Ownership Status and Loan Length

The chart below shows the percentage of borrowers' home ownership status as a function of loan length. This chart shows the same data as the chart above, but shows the composition of borrowers who own, rent, or carry mortgage on their homes for 36 month and 60 month term loans. With this chart, it is much easier to point out that higher number of 36 month term loans are issued to borrowers who rent home and higher number of 60 month term loans are issued to borrowers who have mortgage on their home.

Lending Club Loan Length and Borrower's Home Ownership Status

The chart below shows the borrowers' home ownership status and average monthly loan payment for loans issued between 2010 and 2012 YTD. The average monthly payment for borrowers who have mortgage  is higher than for borrowers who rent their homes. This observation is not surprising considering the average loan amount for borrowers who have mortgage is much higher as observed in the previous post. However, it doesn't help in explaining the propensity of borrowers with mortgages to take out longer term loans at Lending Club.

Lending Club Borrower's Home Ownership and Average Monthly Loan Payment

The chart below shows the borrowers' home ownership status and their average debt-to-income ratio for loans issued between 2010 and 2012 YTD. There is no significant difference in average debt-to-income ratio of borrowers based on their home ownership status.

Lending Club Borrower's Home Ownership Status and Average Debt to Income Ratio

It appears that both monthly loan payment and debt-to-income ratio are not associated with the propensity toward longer term loans by borrowers who have mortgage.

Key Takeaways

• With the interdependence of Interest Rate with Borrower's FICO range, credit age and home ownership status, most lenders would be fine with only using one of these three parameters or may need to de-emphasize the weightings of all these parameters to not let them overly influence loan selection process.
• The Loan Length appears to be independent of Borrower's debt-to-income ratio, home ownership status, and monthly loan payment. It would be recommended for lenders consider all these parameters in loan selection process. 

Lending Club Borrower's Home Ownership and Loan Characteristics, Part I

In this post, I will review the home ownership status of borrowers and loans issued at Lending Club platform. Lending Club categorizes the home ownership status of borrowers as Rent, Mortgage, Own, None, and Any. While Rent, Mortgage and Own are self-descriptive, I am not so sure what None and Any categories represent and how they differ from each other. For the purpose of analysis, I combined the None and Any categories together.

Over the past year, I have come across multiple loan listings where a borrower indicated home ownership status of Own but had one or more mortgage accounts, loan description or Q&A mentioned having mortgage. I believe some borrowers may be confusing the Mortgage and Own categories.

Loan Volume

The chart below shows the percentage of loans issued in each application year to borrowers with each of the four categories of home ownership status: Any or None, Own, Mortgage, and Rent.

Lending Club Borrower's Home Ownership Status and Loan Volume

The combined category of Any or None accounted for less than 0.002% of loan issued in 2012 YTD and 0.004% in 2011. The highest percentage of loan issued to borrowers with home ownership status of Any or None was 1.90% in 2008. Between 2007 and 2012, only 102 loans were issued to borrowers with home ownership status of Any or None.

Majority of loans are issued to borrowers who declared either renting home (on average 50% from 2007 to 2012) or having mortgage on home (on average 42%). Lenders excluding any one of these two categories in their loan selection criteria are ignoring almost half of the loans available on Lending Club platform.

With the exception of 2012 YTD, the percentage of borrowers who rent home is declining while borrowers who has mortgage on their home is rising. Considering we went through a deep recession, primarily due to Real Estate bubble, the rise in borrowers who have mortgage on their homes is not surprising. The 2012 may be start of reversal in these trends.

Loan Amount Funded

The chart below shows the percentage of total loan amount funded in each application year to borrowers with different home ownership status.

Lending Club Borrower's Home Ownership Status and Total Loan Amount Funded

What is interesting about this chart is that the percentage of loan amount funded for borrowers who rent home is lower than the percentage of loan volume for such borrowers as shown in the previous chart. For example, in 2012 YTD, borrowers who rent home received 47% of total loans but only 42% of total loan amount. The trend is reverse for borrowers who have mortgage on their home. This observation seems to indicate that the borrowers who have mortgage seem to request higher loan amount than the borrowers who rent home. These observations are also confirmed by the chart below that shows the average loan amount funded for borrowers with different home ownership status.

Lending Club Borrower's Home Ownership Status and Average Loan Amount Funded

As the chart shows, in 2012 YTD, borrowers who have mortgage on their home borrowed almost $3,000 (~20%) more than their counterparts who rent home. This observation is perplexing as why a borrower who already have a mortgage (supposedly much larger than any other debt) would request loans for large amount. Only logical explanations I could come up with are that most borrowers don't consider mortgage same as other debt, they are more comfortable carrying additional debt, and they are likely to borrow for large value home improvement projects.

To confirm whether borrowers who have mortgage borrow large amount for home improvement purposes, I filtered the above chart to only include loans where borrower declared the loan purpose to be home improvement. The chart below is its result.

This chart indicates that in 2012 YTD the borrowers who carried mortgage borrowed on average $13,589 for home improvement loan purpose compared to $14,681 borrowed for all loan purposes. This would indicate that hypothesis of higher average loan amount due to home improvement projects is incorrect.

Lending Club Borrower's Home Ownership Status and Average Loan Amount for Home Improvement Loans

Key Takeaways

• Excluding any one of the home ownership status of mortgage or rent will reduce the loans available for lending by almost 50%.
• The borrowers who carry mortgage are likely to request larger loan amounts and such loans will not necessarily be for home improvement purpose.