Mad Rush at Lending Club Loan Release Time: Part III - Delinquency Rate and FICO Score Change

Posted by Anil Gupta | Sunday June 22, 2014, 10:09 pm | Categories: Lending Club

This post is the third part of the Mad Rush at Lending Club Loan Release Time series analyzing loan attributes and performance with time to fund. You may want to first read Part I and Part II for proper context.

As most of the loans in this study have only been issued for 7 - 10 months, very few loans have been charged off and fully paid as discussed in last post. In this post we will review two predictive measures: delinquency rate and FICO score change that can potentially predict troubled loans.

Delinquency Rate

The delinquency rate is generally defined as the loans that have delinquent payment as percentage of total loans in a loan portfolio. We consider a loan to be delinquent when it has one of the following loan status: In Grace Period, Late (16 - 30 days), Late (31 - 120 days), Default, and Charged Off. Below we will evaluate delinquency rate with time to fund.

Figure 1 below shows the percentage of loans delinquent with time to fund. The horizontal red line show the delinquency rate for all loans. The gray band shows the 95th percentile for delinquency rate.

In aggregate, 2.978% of loans were delinquent. The fastest funded loans seem to have the highest delinquencies (4.135%), 39% higher than that for all loans and 2.69 times higher than the lowest delinquent rate for the slowest funded loans (32+ hours). The delinquency rate seems to decline with increasing funding time for first three hours. This trend is much stronger and consistent than the charged off rate trend shown in Figure 1 of last post.

Figure 2, 3 and 4 below show the delinquency rate with time to fund for loans with credit grade A and B; C, D, and E; and F and G.

Table 1 shows the delinquency rate with credit grade for all loans in aggregate as well as for loans funded within a few minutes of being listed.

Table 1: Delinquency Rate with Credit Grade Credit Grade A and B C, D, and E F and G Total Funding Time (0 - 1 minutes) 1.04% 4.72% 9.04% 4.14% Funding Time (2 - 3 minutes) 1.62% 4.28% 8.95% 3.85% All Loans in Dataset 1.28% 4.03% 7.86% 2.98%

Following observations can be made from these charts and table:

The delinquency rate increases with credit grade.

For loans funded within first few minutes of being listed, the delinquency rate is lower for Grade A and B loans and higher for Grade F and G loans. It appears lenders lending to Grade A and B borrowers will benefit from rushing to lend soon after loans being listed. The rushing to invest in Grade F and G borrower may be counter-productive for the lenders.

The delinquency rate for the fastest funded Grade A and B loans is almost half than those that took 4 - 10 minutes to fully fund, similar to the Figure 2 of last post.

The C, D, and E grade loans funded within a minute or between 3 to 12 hours appears to have the highest delinquencies. The loans fully funded between 12 and 18 hours and over 32 hours appear to have the lowest delinquencies. The pattern for loans funded within an hour of being listed is similar to the Figure 3 of last post.

The F and G grade loans that took longest (32+ hours) to fully fund have the highest delinquency rate of 11.11%. Comparing with Figure 4 of last post, while for the loans funded within 2 - 3 minutes, the charged off rate was lowest, the delinquency rate is similar to the loans funded in less than a minute.

FICO Score Change

In the previous post FICO Score Trends and Defaults for Lending Club Loans, we showed a strong relationship between drop in FICO score and potential defaults. Below we will evaluate FICO score change with time to fund. The FICO Score Change is calculated by subtracting the Original FICO Range High from the Last FICO Range High. The FICO Score Change is grouped in three groups: UP when Score increased, DOWN when score decreased, and FLAT when no change in score.

Figure 5 below shows the percentage of loans with different FICO Score Trend with Time to Fund. The horizontal red line shows the percentage of loans with DOWN FICO Score Trend for all loans in the dataset.

In aggregate, the FICO score of borrowers for 36.35% of loans has downward trend. The largest percentage of loans with DOWN FICO score (41.88% of total loans issued) are the ones which were funded the earliest. There is a consistent decline in percentage of loans with DOWN FICO score with time to fund with lowest at 28.74% for loans that required 15 - 18 hours to fully fund after being released.

Figure 6, 7, and 8 below show the FICO score trend with time to fund for loans with credit grade A and B; C, D, and E; and F and G.

Table 2 shows the percentage of loans with FICO Score Trend DOWN with credit grade for all loans in aggregate as well as for loans funded within a few minutes of being listed.

Table 2: DOWN FICO Score Trend with Credit Grade Credit Grade A and B C, D, and E F and G Total Funding Time (0 - 1 minutes) 35.72% 42.94% 53.11% 41.88% Funding Time (2 - 3 minutes) 38.34% 40.51% 45.26% 40.22% All Loans in Dataset 32.45% 39.08% 44.67% 36.35%

Following observations can be made from these charts and table:

The percentage of loans with DOWN FICO trend increases with credit grade in aggregate as well as for loans that were funded within a few minutes of being listed.

In aggregate, the percentage of loans with DOWN FICO trend declines with increasing time to fund for the first 12 hours. This indicates the borrowers’ risk of default increases at higher rate for loans that are fully funded very quickly.

The fraction of DOWN FICO trend only declines for loans with credit grade A and B for the loans funded within the hour of being listed. For all other loans grades, the fraction of DOWN FICO trend increases with time to fund for the first 12 hours.

Key Takeaways

Both delinquency rate and FICO score change, in addition to charged off rate and bad-to-good loan ratio covered in the previous post, appear to indicate that rushing to invest in newly released loans is not a profitable strategy except for loans with grade A and B.

Considering the grade A and B loans that are funded quickly perform better, some lenders may have figured out the “real” profitable sub-segment of A and B loans and may have been using automation to capture these loans quickly. This is inline with experiences of a few large and institutional investors who invest in grade A and B loans and previously mentioned to me that good loans go quickly.

The loan performance with time to fund can further be investigated from different perspectives using various measurements such as loss rate, gross yield and actual yield. In the next few posts, we will start analyzing loan attributes with time to fund and cover other performance measurement as time and space permits.