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.

Lending Club Borrower's Credit Age and Loan Defaults

In this post, I continue the analysis of borrower's earliest credit line and relationship with loan status. As Lending Club doesn't publish the age of borrower, in this analysis I use the year of earliest credit line, termed credit age, as proxy for borrower's age. I am particularly interested in finding out whether:

• The finding from past consumer finance research of older borrowers being higher credit risk holds true for peer-to-peer lending platforms, and
• The borrowers with recent earliest credit line are higher credit risk, as asserted by White Coat Investor in his blog post Peer to Peer Lending Club Update.

Personally, I believe that Lending Club borrowers with earliest credit line several decades old likely to be much higher credit risk. Such borrowers in need for loan with high interest rate are likely to be not very savvy in managing their finances.

Earliest Credit Line and Loan Status

The chart below shows the loan status as a function of the year of earliest credit line. The loans issued to borrowers who started their credit in early 70's or earlier seem to have higher charged off, defaults and late payments. With 40+ years of credit history, these borrowers are likely to be in their late 50's and early 60's.

It may appear from the chart that loans issued to young borrowers who started their credit history in 2007 and later seem to have lower charged off and later payments. Considering that the fully paid loans are also lower for such borrowers, I believe most of these loans were recently issued. Even though I didn't find any explicit statement, I believe Lending Club doesn't issue loans to borrowers who have less than three years of credit history.

The chart below shows the charged off and default loan status as a function of the year of earliest credit line by loan application year 2008 through 2010. The loans issued to borrowers that started their credit history in 1970's or earlier appear to have consistently higher charged off and default status. There is no such pattern for borrowers with recently established credit history.

Credit Age and Loan Status

The chart below shows the loan status as a function of credit age. The pattern of loans issued to borrowers with longest credit history (40+ years) with higher charged off and default loan status, observed in first chart appears to hold. Also, loans issued to borrowers with credit history less than four year old appears to have higher charged off and default loan status.

The chart below shows the charged off and default status as a function of credit for application year 2008 through 2010. While borrowers with long credit history continue to show higher tendency to have loans charged off and defaults, there is no such consistent pattern for borrowers with short credit history.

Key Takeaways

• The borrowers with long credit history (40+ years) tend to have more loans charged off or defaulted. Risk averse lenders may benefit by avoiding older borrowers.
• There is no consistent patterns of charged off and defaults with younger borrowers. Lenders may consider taking a cautious approach toward borrowers who have less than four years of credit history.

Lending Club Loan Borrower's Earliest Credit Line and Loan Volume

After returning from vacation, I have started to analyze Lending Club historical loan data again and have improved PeerCube further. I am pleased to see PeerCube user base growing another 20% in my absence. Peter was kind enough to set up a section for PeerCube on Lend Academy forum. I'd like to encourage you to use the forum to suggest enhancements, request new features, and report any issues on PeerCube.

In a few posts, I will analyze a correlation between borrower's earliest credit line and credit risk. The past consumer finance research indicates that age of the borrower is significantly related to credit risk. As Lending Club doesn't publish the age of the borrowers, I have been using Earliest Credit Line as a proxy for age in my loan selection at Lending Club.

I am particularly interested in finding out whether the year of earliest credit line moves with loan application year as that would indicate a particular age group of borrowers more likely to use peer to peer lending for their credit needs.  My impression is that most people start their credit in late teens and typically get into credit problems in late 20's or early 30's if they don't manage money properly. I expect that most borrowers on Lending Club to have their earliest credit line opened 10 to 15 years ago.

The chart below shows the loan volume as a function of the year of earliest credit line. The surprising pattern is that the borrowers with first credit line established in year 2000 appears to have most loans issued, year after year. The breadth of years when first credit line was established for which most loans were issued seem to be narrowing with application year.

I wanted to see whether the distribution of loans by borrowers' earliest credit line is changing year over year. The chart below shows the distribution of loans by borrowers' earliest credit line for each application year. The percentage distribution for each application year appears to track closely. While the previous chart indicates that borrowers who established credit line in 2000 have the biggest share of loans, this chart indicates that the percentage of loans issued to borrowers with earliest credit line established in 2000 is rising with each application year and shifted from 1999 and 1996 in earlier application years.

I also calculated the Credit Age in years, the number of days between the earliest credit line date and application date. The chart below shows the loan volume as a function of credit age. The chart is not that different from the first one above. Even though no additional insights I gained from this chart, I expect the credit age to be handy when I analyze loan defaults.

In the next post, I will analyze loan defaults with respect to earliest credit line and credit age.