Consumer Credit Trends – Q1 2015 Prosper Update
We’re now 4 months into 2015, and the consumer marketplace lending industry has continued to grow rapidly. In order to fuel increased investor demand, we’ve seen rapid growth in origination volumes across marketplace lending originators. A question on many investors’ minds is whether the growth in originations comes at the cost of borrower credit quality. We previously performed an analysis of consumer credit trends in October, but now we’d like to revisit this topic to review the additional data we’ve received in the past 6 months. In today’s analysis, we will explore the borrower credit characteristics and repayment performance of recent vintages.
Growth in Originations
As seen in the chart below, Prosper origination volumes grew steadily through the end of 2014. Prosper originated $197,447,938 in December 2014, up from $157,745,187 in November and $59,775,615 in December 2013. While we did see a slight dip in originations in November, the December numbers were very strong, reaching a new all-time high for Prosper. Prosper hasn’t yet released its Q1 2015 origination numbers, but it will be interesting to analyze whether the growth continues at this rate.
Distribution by Credit Grade
In order to get an idea of borrower credit quality, let’s take a look at Prosper’s monthly origination volumes by credit grade. The distribution is noticeably consistent month over month, especially since the start of 2014.
While the above graph demonstrates that the distribution based on Prosper’s internal measure of credit risk is stable, it is a good idea to also analyze the distribution based on an externally defined measure of credit risk, such as FICO. The graph below shows that the distribution based on FICO is also quite stable. A careful review of the data even shows a moderate increase credit quality in the FICO score distribution over time. Maintaining a stable credit distribution while undergoing such steady growth is not easy and indicates careful underwriting by Prosper.
When we look at the distribution of FICO by credit rating, we see that Prosper has clearly done some adjusting within their own credit model, but the distribution is still generally consistent.
As a final review of borrower credit quality, let’s review the loan performance by vintage. What we show here is the 30+ day delinquency rates for all Prosper loans from 2008 – 2014 (Q1 – Q3). The graph demonstrates that 2013 and 2014 are the best performing vintages so far. The 2014 vintage performance is tracking the 2013 curve very closely, indicating consistency in underwriting.
Leading up the the financial crisis in 2008, we saw many traditional originators relaxing their credit standards in order to increase origination volumes. This approach was often cheaper than the expense of marketing to and acquiring more creditworthy borrowers, but as we saw, the outcomes can be disastrous. Borrower credit characteristics are on the forefront of many investors’ minds, and it is important to carefully investigate any changes in credit quality over time. With marketplace currently representing such a small piece of consumer lending, originators have been able to increase volumes while still focusing on high quality borrowers, and we have not yet seen any indications of relaxing credit standards. We look forward to continuing to monitor the volume, distribution, and performance of Prosper and other marketplace originators.