Lending Club made news earlier this month when they announced they were increasing interest rates again. But what they also shared was that this was partly due to an increase in delinquencies in particular at the higher risk end of the credit spectrum.
Grades E, F and G at Lending Club are at the highest interest rates ever with the top rate for a G5 rated loan now at 30.99%. The interest rates on these higher risk loans have been steadily increasing for many years. I have a screenshot I took back in October 2010 when a G5 loan had an interest rate of 21.14%. Today, a loan with that interest rate would be rated D5 at Lending Club
So, does this mean that the G5-rated borrower of today is more risky than the G5 of 2010? Certainly the expected loss for the 2016 borrower is far more than this same person in 2010. But while interesting I don’t think this says much about the possibility of a recession in the near future. It simply means that Lending Club is targeting a higher risk borrower.
Having said that, the reality is that there has been higher than expected delinquencies in the higher risk portions of Lending Club’s portfolio. Here is a paragraph from their 8-K released last Friday:
Consistent with observations earlier this year, we have continued to observe higher delinquencies in populations characterized by high indebtedness, an increased propensity to accumulate debt, and lower credit scores. Although the trend can now be observed across grades, it is less notable in lower risk grades and more notable in higher risk grades, particularly grades E, F and G, which account for approximately 12% of platform volume. Higher delinquencies are more evident in 2015 and early 2016 vintages, which coincides with an uptick in consumer indebtedness in the U.S.