Peer-to-Peer lending giant, Prosper.com, has soured its investors by originating loans to customers that are, in retrospect, not creditworthy. Lending Club has avoided many of the delinquency problems that Prosper.com has had by placing much more stringent requirements on borrowers. In a recent online meeting between Lending Club and its investors, Lending Club outlined the qualifications that they use to determine if a borrower should be approved for a loan.
Lending Club relies heavily on statistics from Fair Isaac that states consumers with credit scores of less than 650 will have average delinquency rates of 10.6%. Customers with credit scores less than 600 will have average delinquency rates of 48.3%. For this reason, Lending Club only provides loans to borrowers that have credit scores of 660 or above. According to Fair Isaac, consumers with credit scores above 650 have likelihood of 0.2% to 4.4% of becoming delinquent. By only providing loans to customers with scores of 660 or more, Lending Club ensures that it’s only providing loans to the borrowers that are most likely to repay.
Lending Club recently increased their credit score requirement from 640 to 660 as the number of borrowers that they have increased. Lending Club has reported that the average FICO score of its borrowers is currently 713.
Lending Club also requires its borrowers to have 3 years of credit history, no active delinquencies and no bankruptcies. The company also requires its borrowers to have a debt-to-income ratio of no more than 25%. According to company-provided statistics, the average debt-to-income ratio of their borrowers is 10%.
Some investors have become very negative of the first peer-to-peer lending company that gained significant in the United States, Prosper.com, for failing to accurately gage the risk of its borrowers and for failing to have any meaningful collections practices. Lending Club appears to have learned a lesson from Prosper.com by turning away 90% of borrowers that apply for loans and only originating loans to customers that are likely to repay their loans.
