Rejected Loans on LendingClub – The Post-IPO Edition
In November 2013, we analyzed the dataset of LendingClub’s rejected loan applications. At that time, we found that approximately 90% of applicants were not approved for a loan. Over the past year and a half, much has changed. LendingClub originated over 2 times the volume in Q4 2014 as it did in Q3 2013, and the entire marketplace lending ecosystem has garnered significant attention. While we generally spend most of our time focusing on the volume, composition, and performance of loans that were successfully originated, it is interesting to also explore those borrowers who did not qualify for a loan, particularly as a measure of general consumer awareness of LendingClub as a financing option. Today, we will revisit this now larger dataset and explore any changes in the population of declines.
We had hypothesized that after the LendingClub IPO, increased coverage in the mainstream media would lead to a significant increase in applications for LendingClub loans. Since our last analysis, the application volume has risen dramatically, with LendingClub in some cases now processing over 200,000 applications per month.
As the company’s public profile has increased, so has the number of people going to its website to obtain a loan. One interesting aspect of the graph above is the recent volatility in overall monthly application volume. This could reflect either seasonality in the demand for credit or periods of increased marketing campaigns on the part of LendingClub.
One of the stated reasons for LendingClub’s public offering was to invest in marketing, and indeed, investment in these areas has since increased significantly, with sales and marketing expenses for Q4 2014 amounting to $26.5MM according to public filings, double the amount from Q4 2013.
In any rapidly growing borrower population, it is important to understand trends in credit quality. In the graph below, we show the distribution of approved and declined loans by FICO score, comparing the distribution from Q4 2013 to that of Q4 2014.
As we can see, the proportion of declines coming from the lower FICO ranges has increased quite a bit, showing that a wider range of consumers are now applying for credit. Interestingly, however, the FICO distribution among approvals maintains a nearly identical shape, indicating stability in LendingClub’s underwriting policy even amidst a flood of applications.
In December 2014, LendingClub’s approval rate was 5.8%, down from 14.4% in December 2013. Even as application volume has surged, the underwriting policy has remained selective, something that is understandably important to any investor on the platform. Of course, there is the interesting question of what, if any, opportunity exists in the declined population, which numbered over 168,000 in December. Clearly, LendingClub is establishing itself as a major name in American financial services, accordingly attracting large volumes of customers. While only a small fraction of these customers qualify for the company’s presently-offered loan products, there could be additional opportunity, perhaps by offering non-loan-based financial services or by referring these consumers to partner companies. It is unclear if either possibility is in the works, but one thing is certain: the demand for consumer credit is strong, and there is significant potential for lenders who can demonstrate a compelling brand and positive customer experience.