Last week, we wrote a post on the growth and performance of Prosper’s lending marketplace. We found that, in addition to the tremendous growth Prosper has shown over the last 2 years, the credit performance has actually continued to improve. This week, we are reviewing similar metrics for Lending Club. As we mentioned last week, 2014 has been a year of unprecedented growth in consumer marketplace lending. As more borrowers and investors have learned of this new asset class, new loan origination volumes have increased at an impressive rate. Many investors and observers understandably wonder whether originators have been able to maintain their standards amidst this growth or if the expansion has come at the expense of credit quality. In today’s analysis, we will explore the credit characteristics and repayment performance of recent LendingClub vintages.
Lending Club’s historical loan book is delayed by 3 months, so we will be looking at growth volumes as of June 2014.
A Time of Growth
LendingClub originated just over $1 billion in loans in the 2nd quarter of 2014, up from $791 million the previous quarter and $446 million in Q2 2013. The graph below shows the growth in quarterly originations for prime consumer loans, the largest portion of LendingClub’s portfolio, as the data on Springstone, near-prime, and small business were not publicly available.
Distribution By Credit Grade
The graph below shows the proportion, by LendingClub’s credit grade, of monthly originations. The distribution has been extremely stable, which is what we expected given the consistency we’ve seen in LendingClub’s borrower profile and underwriting strategy over the past two years.
Credit grade, of course, is Lending Club’s own internal measure of credit risk. It is prudent to compare this to a stable, externally-defined measure of risk, such as FICO. The graph below shows an impressively consistent distribution of FICO scores, with ~40% of borrowers having a FICO > 700.
Finally, we review the vintage performance. What we show here are the cumulative 30+ day delinquency rates for all LendingClub loans originated between January 2008 and March 2014. Remember that these curves include all loans that ever were 30+ days past due, many of which do not actually charge off. Nevertheless, it is useful to use this “early warning” metric to be able to examine the performance of more recent vintages that may have not be seasoned enough to have statistically significant charge-offs.
This graph shows essentially every vintage of loans performing better than the previous, with loans issued this year trending as the best vintage to date. This is quite a testament to the resources that the LendingClub team has devoted to refining their underwriting. By focusing on the quality of their borrowers, LendingClub has proven that rapid growth in lending can be accomplished without sacrificing performance.
As we have seen, marketplace lending has been growing at a rapid pace over the past few years. This growth has brought both LendingClub and Prosper from being nichey, obscure options to serious lenders, providing much-needed lending products to borrowers across the credit spectrum. However, the fast pace of their growth is actually not the most impressive fact about these 2 loan originators. The quality and restraint with which they have been able to do so is the truly impressive feat.
Now that the business model of marketplace lending has demonstrated its value, additional originators are quickly emerging across a full range of consumer and commercial credit products. We truly hope that all participants in this market will adopt and maintain a program of smart, robust, and data-driven risk management, just as we have seen from the industry’s pioneers. At Orchard, this is a top priority in our evaluation of each new originator with whom we do business. We are optimistic for the continued success of this movement and excited to do our part: providing institutional investors with the technology and analytics they need to effectively deploy capital and working with originators to accelerate their growth with a marketplace of investors.