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Author Topic: LC FICO vs Loan Grade

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LC FICO vs Loan Grade
OP: October 30, 2016, 11:00:00 PM
For awhile now I've noticed how each LC loan grade is spread across a wide range of FICO scores.  Justifiable, I suppose, because Grade is a better indicator of LC loan loss than FICO IMHO.  On the other hand investors seem to go nuts over that FICO up/down indicator on the secondary market, as if it were a very sensitive indicator.  I dunno.  I don't have a conclusion here.  I just present a chart...



Those are mostly 5 point buckets.  The software I used didn't want to play nice, so it made a couple of 10 point buckets over on the right side.  Sorry about that.  Doesn't change the picture much tho.
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r
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LC FICO vs Loan Grade
#1: October 30, 2016, 11:00:00 PM
I think you are focusing on level. Early on in my financial career I was told to always look at level and trend. So level is the FICO score. It is a measure of risk. So that level is spread across grades. So what about trend?

Other than payment, FICO is the only variable that updates. If the loans were regraded each month, this would likely be more predictive. But given its all that we have, what information does the trend convey? I believe it conveys how risk has changed since the loan was made. Credit scores have a monthly standard deviation of like 20 points IIRC. I only care about trends outside this normal range. And I believe it conveys very meaningful information, especially for debt consolidation loans, both in the first few months (showing evidence funds were used as disclosed) and over the life as the borrower goes delinquent on other debts, takes new debts out, etc. 

I made my initial decision based on a level of risk. If that risk is gotten worse, then there is a chance the yield is no longer good enough. If I was presented with that loan today, would I still make it? If the answer is no, that loan is sold without hesitation.

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LC FICO vs Loan Grade
#2: October 30, 2016, 11:00:00 PM
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l
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LC FICO vs Loan Grade
#3: October 30, 2016, 11:00:00 PM
LendingRobot presented criteria across grades in another way that I liked some time ago.
FICO is one of my note purchasing criteria.  I have a floor for each grade I invest in. To me it shows insight into a historical behavioral pattern. Yes, I realize it can be manipulated but I go with the bell curve.

Image: http://i.imgur.com/K0PIELI.png
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LC FICO vs Loan Grade
#4: October 30, 2016, 11:00:00 PM
Funny, but I just happened to run an interesting test yesterday that seems to be relevant here. It was a quick and dirty test and may have been flawed so take the result with that in mind! Caveat Emptor. Still ...

The hypothesis tested was that a drop of N FICO points below FICO edit of previous month for a Never Late loan could serve as a leading indicator to sell that loan. Since the loan is Never Late it should be possible to sell it on Folio at a discount no worse than -9% and avoid a potentially much larger loss if/when the loan charged off. From the pmthistall.csv file I extracted all vintage 2013 Q1, grade D term 36 month loans. All are fully matured now (either Fully paid or Charged off). Bottom line was that I could find no value for N that resulted in improved profitability. I did not search for a sales discount less than -9% that would make this a profitable strategy and think it unlikely one exists. It wasn't even close.

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LC FICO vs Loan Grade
#5: October 30, 2016, 11:00:00 PM
Have you read this yet?

https://www.peercube.com/blog/post/fico-score-trends-and-defaults-for-lending-club-loans

And I wish there was a way to automate the FICO spike detection. When my account was only a few hundred notes, I monitored it and sold those that didn't spike or started to lose the spike. But it's impossible with thousands of notes.

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LC FICO vs Loan Grade
#6: October 30, 2016, 11:00:00 PM
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LC FICO vs Loan Grade
#7: October 30, 2016, 11:00:00 PM
I wonder if trying to determine an n level of FICO drop of each month for each grade would be a better determining factor, so say a loan is 6 months old w/ an a score at origination of 670, at month 7-n what would the score have be to indicate a possible default?
from: Rob L on October 31, 2016, 10:01:57 AM
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LC FICO vs Loan Grade
#8: October 30, 2016, 11:00:00 PM
Bigger FICO drops can happen for a reason and not necessarily because of missing payments.  FICO is very sensitive to running a high balance on a CC.  I did this earlier in the year with a balance transfer card.  (Was probably really dumb to do as I do not run balances monthly.)  But I got a limit of 1k on a 0% balance transfer CC and topped it off.  My FICO dropped 47 points.  My overall utilization did not change but because I had such a high utilization on just one card it made my FICO go nuts.  The crazy thing here though that when I made a $25 payment to take the utilization under 80% my FICO jumped over 20 points.  How silly is that?  That is the problem with FICO scores is it does not tell you exactly what is going on with them. 
I do not sell my notes just because of a FICO drop, not sure where I would start selling them due to a drop.  When I buy notes on FOLIO I would not touch a down FICO of let's say 50 points in the past couple of months even with a 20% discount.  Now toss in the fact that the notes might have an IGP recently on it and that note becomes toxic for me.  I do not buy many notes on FOLIO so I can be very picky, but even with being picky I have had FOLIO notes with up FICO and perfect 15-month payment history go bankrupt out of the blue.  (Seeing more go IGP recently which has me more than a bit concerned.)
Rob makes a point where he looks at the FICO not from origination.  If I am looking at a 60 month note that the FICO score was destroyed in the first year, do I care what the original FICO score is?  Or do I only care about how the FICO has rebounded after whatever devastated the score?  I wish I knew what killed the score at the time.  CC utilization is way more favorable than missing or defaulting on payments. 
These are things that make FOLIO notes tough to buy and where the poor pricing makes it even tougher to deal with. 
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LC FICO vs Loan Grade
#9: October 30, 2016, 11:00:00 PM
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#13: October 31, 2016, 11:00:00 PM
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#14: October 31, 2016, 11:00:00 PM
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