I was in San Francisco last week visiting Lending Club and Prosper. So I took the opportunity to sit down with the risk management team at Lending Club to delve into the underwriting changes they introduced late last year.
As Anil from Random Thoughts pointed out recently at first glance it seems that Lending Club has moved to a riskier credit profile. Given that Lending Club now allows borrowers with a bankruptcy or a current delinquency it is easy to see how one would get that impression.
But Lending Club said the changes have resulted in a better ranking of risk that should lead to a more conservative credit profile overall. How is that possible given the supposedly more lax underwriting criteria? They went through a whole presentation with me to explain these changes in detail.
A Brief Summary of the Underwriting Changes
Before I get into the detailed explanation let’s first look at some of the changes that were made. Many of the changes were detailed in the Random Thoughts post and you can always read the latest underwriting requirements in the Lending Club prospectus. Here are the five main changes:
- Maximum number of credit inquiries is now 6 for all borrowers (before it was maximum of 3 inquiries for FICO scores of less than 740 and up to 8 inquiries for scores of 740 or more).
- Current delinquency now allowed.
- Revolving credit balance maximum of $150,000 restriction removed.
- Major derogatory record (meaning a bankruptcy) now allowed.
- Maximum credit utilization of 98% restriction removed.
Swapping in and Swapping Out
According to Lending Club the latest underwriting changes did two things. It removed the highest risk borrowers that were previously being approved and it added back in the best borrowers from previously declined populations. This was obviously not a change that was taken lightly – a huge amount of analysis has gone into this decision.