Mad Rush at Loan Release Time: Part II - Loan Performance with Time to Fund

Posted by Anil Gupta | Sunday June 15, 2014, 11:20 am | Categories: Lending Club

In the previous post Mad Rush at Lending Club Loan Release Time: Part I, we analyzed listing volume, issue volume, and time to issue with Credit Grade and Time to Fund. The key takeaway from the last post was that half of listed loans are funded within the hour of being listed, i.e. early bird gets the worm.

In this post we will review the performance of loans with time to fund, i.e. the quality of the worm. As most of the loans in this study have only been issued for 7 to 10 months, we expect to find fewer loans that may have been charged off.

Charged Off and Default Loan Status

Figure 1 below shows the percentage of loans that have been charged off or defaulted with Time to Fund. The solid red horizontal line at 1.081% shows the charged off rate for all loans in this dataset. The gray band shows the 95% confidence interval (0.648 - 1.238%). The highest charged off rate is for the loans funded within a minute (1.875%), whereas the lowest charged off rate is for loans funded between 18 to 32 hours (0.395%). The charged off rate for loans funded within 10 minutes appears to be much higher than that for all loans.

A caution is in order here. As the previous post mentions almost 50% of listed loans that were funded within 10 minutes have credit grade between D and G that carry higher interest rate and have higher risk. It is possible that charge off rate for loans funded within 10 minutes may be higher due to predominantly higher risk of D through G grade loans. To verify this assumption, we decided to review charged off rate by credit grade with Time to Fund. The Credit Grades were divided into three groups:

Loans with Credit Grade A and B (Loan Count: 10,764) Loans with Credit Grade C, D, and E (Loan Count: 11,700) Loans with Credit Grade F and G (Loan Count: 1,209)

Figure 2 below shows the percentage of Grade A and B loans that have been charged off with Time to Fund. There is no discernible pattern with A and B grade loan charge offs with Time to Fund. The charged off rate for A and B grade loans funded between 4 and 10 minutes after being listed (1.06%) is highest and more than double of all A and B grade loans (0.48%). The charged off rate for A and B loans that were funded within 10 minutes (0.65%) is about 35% higher than for all A and B loans (0.48%). The charged off rate for A and B loans that took more than 5 hours to fund (0.35%) is about 25% lower than for all A and B loans.

Figure 3 below shows the percentage of Grade C, D and E loans that have been charged off with Time to Fund. The charged off rate for all C, D, and E grade loans (1.46%) is almost three times higher than that for all A and B grade loans (0.48%). There is a steady decline of charged off rate for C, D, and E loans with Time to Fund for loans funded within first 60 minutes after being listed. The charged off rate for C, D, and E loans that are funded within a minute (2.02%) is almost twice of that for C, D, and E loans funded between 11 and 60 minutes (1.02%). The C, D, and E grade loans that take 12 to 15 hours to fully fund seem to have lowest charged off rate (0.43%).

Figure 4 below shows the percentage of Grade F and G loans that have been charged off with Time to Fund. You may notice that there were no charge offs for loans that were funded between 11 to 60 minutes and 15 to 18 hours. The charged off rate for all F and G grade loans (2.73%) is almost double that for all C, D, and E grade loans (1.46%). The charged off rate for F and G grade loans that were funded within a minute (5.65%) is almost twice of that for all F and G grade loans. Also, it appears the Grade F and G loans that stay on the platform for 5 - 15 hours tend to have higher charged off rate.

Overall, the lending strategies that depend on being early to lend to new loans as soon as being released may not be as good as some may believe from default perspective.

Bad to Good Loan Ratio

We would like to evaluate effectiveness of any strategy by comparing Bad to Good Loan Ratio. In peer to peer lending scenario, we assume the bad loans are the ones that are either charged off or defaulted and the good loans are the ones that are fully paid. The Bad:Good Loan ratio is the underlying concept used in Bad Loan Experience (BLE) Risk Index as used by PeerCube and covered in PeerCube March 2013 Newsletter. The strategies that have low Bad:Good Loan Ratio or high Good:Bad Loan Ratio are considered better.

Figure 5 below shows the Bad:Good Loan Ratio (in percentage) with Time to Fund for all loans. The solid red horizontal line at 0.129 shows the Bad:Good Loan Ratio for all loans in aggregate. The gray band shows the 95% confidence interval (0.094 - 0.139). The pattern in this chart is very similar to that of Figure 1. The loans that are funded within 1 minute have the highest Bad:Good Loan Ratio. The loans that are funded between 12 and 32 hours appear to have lowest Bad:Good Loan Ratio.

Figures 6, 7, and 8 show the Bad:Good Loan Ratio for Credit Grades A and B; C, D and E; and F and G respectively with Time to Fund. Following observations can be made from these charts:

Grade A and B loans appear to benefit from early investing. The Bad:Good Loan Ratio appears to be low for Grade A and B loans that are funded within first 3 minutes of being released or take between 12 and 15 hours to fully fund.

Grade C, D, and E loans appear not to benefit from very-early investing, within a minute. The Bad:Good Loan Ratio appears to be low for C, D, and E loans that are funded between 2 and 60 minutes and between 12 and 32 hours after being released.

There were no Charged Off Grade F and G loans that were funded between 11 and 60 minutes and 15 and 18 hours thus creating a gap in Figure 8 for Bad:Good Loan Ratio (Orange line). Once again very-early investing doesn’t seem to pay-off for Grade F and G loans also.

Key Takeaways

Lenders using automated systems that depend on speed and trying to invest in loans within a minute of being released may be chasing fool’s good. This is particularly true for lenders who are investing in low quality loans, i.e. loans with Grade C through G. There appears to be some benefit from very-early investing for lenders who invest in Grade A and B loans.

It appears that the periods of low loan listing volumes available on Lending Club may have created the impression that all “good” loans are snapped up quickly. The data doesn’t seem to support such view.

Overall, the above analysis points out that the early worms may be sour. It seems the patience might be the virtue that pays off in the end.

In the next post, we will review a few other measurements and predictors of loan performance with time to fund.