I first noticed these loans back in July when I did a download of the entire Lending Club loan history. There was a new column added to the download file called policy_code. And some recent loans had been added that had a policy_code value of 2, whereas previous loans had a value of 1.
I had been told some changes were coming where different kinds of loans were going to be made available and this looked like it. When you look at these Policy Code 2 loans in the downloadable CSV file you will notice they are different. In fact there are several differences between these loans and the regular loans. For Policy Code 2 loans:
- All of the credit data fields are blank.
- They are all F and G grade loans with interest rates ranging from 23.5% to 26.06%.
- They are all 36-month loans.
- Average loan size is around $8,500, well below the roughly $14,000 average of all loans.
- Maximum loan size is $15,000.
These Policy Code 2 loans have been growing rapidly in volume. The first one was issued on July 12, 2013 and each month has seen a significant increase:
|Month||Policy Code 2||Total Loan Volume||Percent|
|July||$2.7 million||$173.5 million||1.6%|
|August||$10.3 million||$190.3 million||5.4%|
|September||$15.4 million||$203.4 million||7.6%|
|October||$18.3 million||$223.1 million||8.2%|
When I chatted with Scott Sanborn, the Chief Operating Officer at Lending Club, about these new loans he was able to answer many of my questions and clarify exactly what is going on. So here is the rundown on Policy Code 2 loans:
- These are loans made to borrowers that do not meet Lending Club’s current credit policy standards.
- The FICO scores on these borrowers are typically 640-659, below the 660 threshold on Policy Code 1 loans.
- These loans are made available to select institutional investors who have a great deal of experience with consumer loans in this credit spectrum and with Lending Club.
- They are only available as whole loans at this time.
- Lending Club believes that Policy 2 loans could grow to a total of 15% of the total volume over the next 12 months.
Basically, Sanborn said that these are loans to creditworthy borrowers that Lending Club believes should be made. But they want to be completely sure these loans will perform as expected before deciding whether to make them available to everyone. So, a small number of institutional investors are taking the leap by investing in these loans without a track record and knowing full well they do not meet Lending Club’s existing credit policy.
Given that these seem to be riskier loans I wondered why they were listed as grades F and G and not, say, grade H. When I asked Sanborn that question this is what he said:
These are grades F and G because our models tell us that they should perform in the same way. However they are riskier in that we have not served this population before, and we need to be deliberate about making the jump from a spreadsheet to real life.
Given the appetite there is for the high yield segment of the market I imagine there will be large demand among retail investors if and when these loans are made available. I, for one, am hoping they perform as expected and are made available to everyone at some point.