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Lending Club Loan Availability in Second Half of 2013

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FICO Score Trends and Defaults for Lending Club Loans


Recently, I was discussing the selling strategies for Lending Club notes on secondary market with a friend who is very knowledgeable with credit industry. He mentioned that the FICO Score is the only borrower attribute that Lending Club updates after issuing the loans. He believed from his prior experience that updated FICO score plays an important role in determining whether a loan will turn into lemon or not. He suggested that I test out his hypothesis with historical data from Lending Club.

This blog post covers such an analysis that I performed to identify patterns in loan status with the original FICO score and the FICO score trend. The historical loan data file contained loan status and borrower attributes on 248,791 loans issued between June 27, 2007 and February 23, 2014. The loans with loan status of Charged Off and Default were grouped under loan status Default. There are 4.2 fully paid loans for every loan that defaulted, i.e. default rate of 19.18%.

Original FICO Score Range

At the time of listing a loan for funding, Lending Club publishes the FICO Score Range for the borrower (termed here as Original FICO Score Range).

The chart below shows the percentage of loans with loan status of Default and Fully Paid for each Original FICO Score Range of borrowers. The default rate varies from 4.35% for borrowers with FICO Score of 829 to 29.41% for borrowers with FICO Score of 664. The default trend is not surprising; lower the FICO score, higher the chances of defaults. The default risk increases 6.76 times for borrower with FICO Score of 664 versus 829. Even at low FICO Score range, a lender's odds of hitting a good outcome is a little over 2 out of 3.

Original FICO Score and Loan Status

FICO Score Trend

Once a loan has been issued, on Loan Performance page, Lending Club shows the Credit Score change with an arrow and words of UP, DOWN, or FLAT. Based on my readings online, I have the impression that a few peer to peer lenders dispose of the note on secondary market when the FICO Score Trend hits downward. There is some validity to this strategy as shown in the chart below.

The chart below shows the percentage of loans with status of Default and Fully Paid for FICO Score Trend UP, FLAT and DOWN. 35.08% of borrowers with FICO Score trending downward default compared to less than 1% when FICO Score Trend is FLAT or UP. Assuming downward trend in FICO score indicates higher propensity to default, the default rate almost doubles (1.83x to be exact) for borrowers whose FICO score is dropping compared to general population of borrowers.

FICO Score Trend and Loan Status

Is Default causing DOWN FICO Score Trend?

One caveat to the above observation may be that when loan defaults, typically such events are reported on borrower's credit report which in turn results in lowering of FICO score for the borrower.

Without time-series data, it is difficult to say definitely whether downward trend in FICO score indicates higher default probability or default caused the FICO score to drop. To test for this caveat intuitively, we decided to plot the percentage of loans with UP, DOWN, and FLAT FICO Score Trend for different Original FICO Score and Loan Status. As the chart below shows, as the loan status moves along Issued > Current > In Grace Period > Late (16-30 days) > Late (31-120 days) > Default, the fraction of FICO Score DOWN Trend is rising at all Original FICO Score Range. It appears the FICO Score DOWN trend is a gradual process. We can assume that the default by itself didn't cause the drop in FICO Score Trend.

The chart also shows that the downward FICO score trend is much more prevalent at higher FICO Score. This observation is understandable as there is very little room to up the FICO score when a borrower already have original FICO Score of 750+.

Original FICO Score Range and FICO Trend for Various Loan Status

Original FICO Score Range with DOWN FICO Score Trend

What if we combine Original FICO Score Range with FICO Score Trend to determine default probabilities? The chart below shows the percentage of loans with loan status of Default and Fully Paid for each Original FICO Score Range of borrower whose FICO Score Trend is downward. The default risk increases almost 12 times for borrowers with low FICO score and declining versus high FICO score. The default rate varies from 5.00% for borrowers with FICO Score of 829 to 59.53% for borrowers with FICO Score of 669. The default rate for borrowers at low end of FICO Score and declining is double of that for general population of borrowers. For borrowers with Original FICO Score under 679 and declining, there is less than 50% chance for a loan to be fully paid.

Original FICO Score Range and Loan Status with DOWN FICO Score Trend

FICO Score Change

The change in FICO Score was calculated by subtracting the original FICO Score High from the last FICO Score High. That is, the negative FICO Score Change indicates the FICO Score dropped and positive FICO Score Change indicates the FICO Score rose from the Original FICO Score.

The chart below shows the percentage of loans with status of Default and Fully Paid with the magnitude of change in borrowers' FICO score. The default rate for loans starts to rise at about 50 point drop in FICO score of borrowers. Beyond 100 point drop in FICO score, there is less than 50% chance that a loan will be fully paid.

FICO Score Change and Loan Status

Last FICO Score Range

The historical loan data file report the Last FICO Score Range for the borrower. After loans are issued, Lending Club periodically pulls FICO scores for existing borrowers.

The chart below shows the percentage of loans with loan status of Default and Fully Paid for each Last FICO Score Range of borrowers. The default rate varies from less than 1% for borrowers with last FICO Score of 679 and higher to 95% for borrowers with last FICO Score of 499 or lower. For borrowers with last FICO Score less than 609, there is less than 50-50 chance for a loan to be fully paid.

Last FICO Score and Loan Status

Key Takeaways

Depending on the risk tolerance of peer to peer lenders, they can use any of the following criteria based on FICO score to offload their notes in secondary market:

  • Sell Notes for the borrowers whose FICO Score Trend is DOWN.
  • Sell Notes for the borrowers whose FICO Score declined by 50 or 100 points.
  • Sell Notes for the borrowers who are no longer prime borrowers, i.e. last FICO Score below 640.
  • Sell Notes for the borrowers whose last FICO Score dropped below 609.

PeerCube Portfolio Analysis can assist Lending Club Lenders with identifying notes with FICO Score Trending DOWN and also groups notes by last FICO Score Range.

Comments: (5)

sbgaucho | Tuesday November 4, 2014, 11:55 am

Where did you get the historical FICO score evolution/timeseries for a given note?  Is this something you downloaded daily and stored or something that is available elsewhere?

Anil Gupta | Wednesday November 5, 2014, 11:54 pm

Original and Latest FICO Score data for each loan is available in historical loan data files provided by Lending Club on its website.

FM | Friday December 12, 2014, 2:10 am

Anil, thanks for your analysis. It was helpful. I'd like to clarify: you aren't using time series of FICOs changes just the latest flat file with u/w FICO and current FICO? 2) Wouldn't the standalone fico and the change in fico tell you more of less the same thing? Those with a -100pt chg had their ficos pushed down significantly so the standalone latest_fico is already indicative of their credit risk?Also 100pts at 850 vs 100pts at 659 means much more. Relative changes? And lastly anything relative to national averages. Transunion says the average American fico changes by 20pts a month so anything within that band is just noise. Ping me I have a few ideas for some in depth analysis. 

 

Anil Gupta | Saturday December 13, 2014, 6:31 pm

@FM, you are correct. I am not using time-series FICO data, only the FICO at origination and the latest updated FICO. The difference in FICO is calculated from these two datapoints. IMO, both latest FICO score and change in FICO score are important. Good observation on the relative changes and the main reason for ordering my takeaways based on increasing risk tolerance.

Joanne Passerini | Monday July 20, 2015, 8:03 am

I just received an apology letter from my car leasing company appoligizing for having my financing credit denied. I have a 850 FICO score, we never asked for financing other then the lease amount. How comes i shows we were denied when our FICO was 850..hey also  said that we had too manyn accounts with balances-untrue and length of time accounts have been established.

We hve numerous credit cards that we don't use. How will it effect my credit core if we cancel them and for how long

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