By Ryan Weeks on Monday 17 October 2016
Leading US marketplace lender tighens credit policy to counter increasing consumer indebtedness.
Lending Club has announced changes to its loss projections and credit models, while raising rates by a weighted average of 26bps. In a letter to investors, chief investment officer Siddhartha Jajodia wrote that the changes had been made to continue “providing solid risk adjusted returns to investors”. He also wrote that Lending Club had been seeing higher delinquencies in populations “characterised by high indebtedness, an increased propensity to accumulate debt, and lower credit scores”.
This trend is observable across Lending Club’s loanbook, but is most prevalent in its riskier bands, E, F and G – which account for approximately 12 per cent of the platform’s volume. The macroeconomic backdrop to these developments is that US consumers appear to be taking on higher levels of debt, due primarily to low interest rates. In his letter to investors, Jajodia wrote that “higher delinquencies are more evident in 2015 and early 2016 vintages, which coincides with an uptick in consumer indebtedness in the U.S.”
In reaction to these developments, Lending Club’s interest rates will be increased by a weighted average of 26bps, with changes concentrated in grades F and G, and marginal movements in other grades. The platform already hiked rates by a weighted average of approximately 135bps from November 2015 to June 2016.
Lending Club is also tightening its thresholds on borrower leverage, which is again in line with actions taken by the platform in the first half of the year. From now on, borrowers who meet a combination of risk factors including high revolving debt, multiple recently opened instalment loans and higher risk scores will not be approved. "Approximately 1% of borrowers who previously would have been able to obtain a loan under prior underwriting criteria will no longer be approved,” wrote Jajodia.
The platform has also taken steps to sharpen its collections processes.
As of Friday, Lending Club has updated its loss forecasts (as shown in the chart from PeerIQ below), in order to incorporate its delinquency observations – as well as its updated credit model and pricing. Inclusive of all these changes, the platform projects net investor returns across loan grades “to range from approximately 4% to 8% going forward”.
Source: Company Data, PeerIQ