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[lenderguy]

I'm coming up on an anomoly in my default research that I need an explanation to.  Has anybody closely examined loans that originated at interest rates significantly higher or lower than what would would expect for their credit grade?  Borrower rates seem to be strongly correllated with default rates.

I examine each of the credit grades differently, so it actually isn't a factor in the model.  Anybody have any guesses why high rate prime grade loans default, and lower rate subprime loans are less likely?

[Mark12547]

Actually, that correlation doesn't surprise me.

Remember: correlation does not show causality. (We have examples from MuleShoes to show that low rates themselves don't mean safer loans.)

A more likely explanation is that lenders try to "price in" risks, i.e., bid higher rates on what was perceived to be riskier loans and lower rates on what was perceived to be safer loans, as imperfect as it was. Borrowers of a given credit grade who are "clean" (no delinquencies, no public records, low number of inquiries, reasonable D/I ratio) and borrowers who were favorably vetted would usually get lower rates than those with less stellar credit info for the same credit grade.

[Caladia]

...Anybody have any guesses why high rate prime grade loans default...

There's already been some talk about this in bidding strategy discussions.  The advice usually given is, avoid loans where the rate is unusually high for the credit grade, because there's something wrong there.  Possible explanations:

1.  The borrower is only an "A" on ScoreX-- their FICO score is much lower, so they can't get a decent rate anywhere else, which is why they're willing to settle for a high rate on Prosper.

2.  The borrower is only an "A" on Experian-- there are some negative marks showing on the other Credit Reports, so, again, the borrower's credit is worse than it appears, and that's why they're willing to settle for a high rate.

3.  The borrower is desperate for the money and needs it fast-- never a good thing.

4.  The borrower is a scammer.  They don't care what rate the loan is at, because they're not planning on paying it back.

5.  The listing itself is not good-- there are red flags, but lenders overlook them due to the high rate, thus funding poor loans that would not have funded with a lower rate.

...and lower rate subprime loans are less likely (to default)?

Subprime loans that offer lower rates have to really go through a ringer and lots of scrutiny before they fund.  This means that only the best ones make it through-- the ones that are indeed less likely to default. 

Also there's the thing about borrowers who don't have a lot of money being able to repay a low rate loan, which will have a lower payment, when they might not be able to repay a higher rate loan with a higher payment.

[lenderguy]

There's already been some talk about this in bidding strategy discussions.  The advice usually given is, avoid loans where the rate is unusually high for the credit grade, because there's something wrong there.  Possible explanations:

1.  The borrower is only an "A" on ScoreX-- their FICO score is much lower, so they can't get a decent rate anywhere else, which is why they're willing to settle for a high rate on Prosper.

2.  The borrower is only an "A" on Experian-- there are some negative marks showing on the other Credit Reports, so, again, the borrower's credit is worse than it appears, and that's why they're willing to settle for a high rate.

3.  The borrower is desperate for the money and needs it fast-- never a good thing.

4.  The borrower is a scammer.  They don't care what rate the loan is at, because they're not planning on paying it back.

AA borrower lists a loan at 29% without the Autofund option.  Do you bid?

[Caladia]

AA borrower lists a loan at 29% without the Autofund option.  Do you bid?

Oh hell no.  Others do, though. 

When I listed my "B" loan, I wanted to list it at 12%, which I thought was plenty high.  Sophtommy advised me to list at 16%, and he was right, the higher rate generated more interest.  But I was very anxious about that and almost didn't do it.  I certainly would never have listed at 29%, and my sense is that most AA borrowers are even more uptight about the interest they pay than I am.  They qualify (or should qualify) for those 0% credit card offers, after all.



ETA:  Oh, and another thing, are you controlling for size of loan?  The larger loans tend to fund at higher rates, and they also have higher payments, so more difficult to pay off.

[Risk_Reward]

There's already been some talk about this in bidding strategy discussions.  The advice usually given is, avoid loans where the rate is unusually high for the credit grade, because there's something wrong there.  Possible explanations:

1.  The borrower is only an "A" on ScoreX-- their FICO score is much lower, so they can't get a decent rate anywhere else, which is why they're willing to settle for a high rate on Prosper.

2.  The borrower is only an "A" on Experian-- there are some negative marks showing on the other Credit Reports, so, again, the borrower's credit is worse than it appears, and that's why they're willing to settle for a high rate.

3.  The borrower is desperate for the money and needs it fast-- never a good thing.

4.  The borrower is a scammer.  They don't care what rate the loan is at, because they're not planning on paying it back.

AA borrower lists a loan at 29% without the Autofund option.  Do you bid?

If I was bidding, yes.

[lenderguy]

Oh hell no.  Others do, though. 

When I listed my "B" loan, I wanted to list it at 12%, which I thought was plenty high.  Sophtommy advised me to list at 16%, and he was right, the higher rate generated more interest.  But I was very anxious about that and almost didn't do it.  I certainly would never have listed at 29%, and my sense is that most AA borrowers are even more uptight about the interest they pay than I am.  They qualify (or should qualify) for those 0% credit card offers, after all.

I guess my point is that "everybody knows" an AA won't take a loan at 29%, and is waiting to get it bid down.  But the one time you're wrong, you won't know until it's too late.

ETA:  Oh, and another thing, are you controlling for size of loan?  The larger loans tend to fund at higher rates, and they also have higher payments, so more difficult to pay off.

No.  Loan size is included as a factor in modeling the default probability, but I don't control for it like I do credit grade.

[Loan_shark_74]

AA borrower lists a loan at 29% without the Autofund option.  Do you bid?

Oh hell no.  Others do, though. 

When I listed my "B" loan, I wanted to list it at 12%, which I thought was plenty high.  Sophtommy advised me to list at 16%, and he was right, the higher rate generated more interest.  But I was very anxious about that and almost didn't do it.  I certainly would never have listed at 29%, and my sense is that most AA borrowers are even more uptight about the interest they pay than I am.  They qualify (or should qualify) for those 0% credit card offers, after all.



ETA:  Oh, and another thing, are you controlling for size of loan?  The larger loans tend to fund at higher rates, and they also have higher payments, so more difficult to pay off.

Those 0% credit cards are a dying breed. Also, an AA does not guarantee a 0% offer. Those are based on FICO scores. My fico has bee around 680 to 720 the last 2 years. I received many 0% offers (still do), but according to Prosper I was a HR in January and a D in February. Scorex, IMO, is not an accurate system.

[Caladia]

AA borrower lists a loan at 29% without the Autofund option.  Do you bid?

Oh hell no.  Others do, though. 

When I listed my "B" loan, I wanted to list it at 12%, which I thought was plenty high.  Sophtommy advised me to list at 16%, and he was right, the higher rate generated more interest.  But I was very anxious about that and almost didn't do it.  I certainly would never have listed at 29%, and my sense is that most AA borrowers are even more uptight about the interest they pay than I am.  They qualify (or should qualify) for those 0% credit card offers, after all.



ETA:  Oh, and another thing, are you controlling for size of loan?  The larger loans tend to fund at higher rates, and they also have higher payments, so more difficult to pay off.

Those 0% credit cards are a dying breed. Also, an AA does not guarantee a 0% offer. Those are based on FICO scores. My fico has bee around 680 to 720 the last 2 years. I received many 0% offers (still do), but according to Prosper I was a HR in January and a D in February. Scorex, IMO, is not an accurate system.

Yes, that's what I'm saying.  Just as you show up as HR even though on FICO you're an A, there are people who show up as A on Scorex, even though they're an HR on FICO.  Also, regarding the 0% offers being a dying breed, Lenderguy's research is on past Prosper loans, so he's looking at loans made while 0% offers were fairly common, at least to those who qualified.

@ Lenderguy's

I guess my point is that "everybody knows" an AA won't take a loan at 29%, and is waiting to get it bid down.  But the one time you're wrong, you won't know until it's too late.

My point is that even being willing to *list* at a high rate is a red flag.  Plus, those who list at extremely high rates are less likely to get bid down to normal rates; they're going to fund at higher interest rates than usual, which feeds the argument that they're desperate or scamming.

[lenderguy]

My point is that even being willing to *list* at a high rate is a red flag.  Plus, those who list at extremely high rates are less likely to get bid down to normal rates;

Are  you sure that's true?  I thought a 29% AA was just an invitation to pile on?  Or, are most people like me -- the few times I actually manually bid, I stayed away from those high loans cause I was always sure they'd get bid below my threshold.  But, if enough people think like me, the bidding takes longer to start, and the potential for bid-down diminishes.

[Loan_shark_74]

AA borrower lists a loan at 29% without the Autofund option.  Do you bid?

Oh hell no.  Others do, though. 

When I listed my "B" loan, I wanted to list it at 12%, which I thought was plenty high.  Sophtommy advised me to list at 16%, and he was right, the higher rate generated more interest.  But I was very anxious about that and almost didn't do it.  I certainly would never have listed at 29%, and my sense is that most AA borrowers are even more uptight about the interest they pay than I am.  They qualify (or should qualify) for those 0% credit card offers, after all.



ETA:  Oh, and another thing, are you controlling for size of loan?  The larger loans tend to fund at higher rates, and they also have higher payments, so more difficult to pay off.

Those 0% credit cards are a dying breed. Also, an AA does not guarantee a 0% offer. Those are based on FICO scores. My fico has bee around 680 to 720 the last 2 years. I received many 0% offers (still do), but according to Prosper I was a HR in January and a D in February. Scorex, IMO, is not an accurate system.

Yes, that's what I'm saying.  Just as you show up as HR even though on FICO you're an A, there are people who show up as A on Scorex, even though they're an HR on FICO.  Also, regarding the 0% offers being a dying breed, Lenderguy's research is on past Prosper loans, so he's looking at loans made while 0% offers were fairly common, at least to those who qualified.

@ Lenderguy's

I guess my point is that "everybody knows" an AA won't take a loan at 29%, and is waiting to get it bid down.  But the one time you're wrong, you won't know until it's too late.

My point is that even being willing to *list* at a high rate is a red flag.  Plus, those who list at extremely high rates are less likely to get bid down to normal rates; they're going to fund at higher interest rates than usual, which feeds the argument that they're desperate or scamming.

I got your point. 

[Caladia]

My point is that even being willing to *list* at a high rate is a red flag.  Plus, those who list at extremely high rates are less likely to get bid down to normal rates;

Are  you sure that's true?  I thought a 29% AA was just an invitation to pile on?  Or, are most people like me -- the few times I actually manually bid, I stayed away from those high loans cause I was always sure they'd get bid below my threshold.  But, if enough people think like me, the bidding takes longer to start, and the potential for bid-down diminishes.

It just takes longer to get bid down from 29% to 9% than it does to get bid down from 16% to 9%, especially if the loan amount is large.  Think about it, first the loan has to get fully funded in the first place, which takes a while, then there's that extra 10 percentage points it has to get bid down.  The listing only has 10 days for the bidding to happen.  I think there are some bidders who bid on ANY loans at 29%, and their bids generate early activity, but once they're bid off, they're not going to bid again at 19% or whatever.  And the lenders who consider unusually high rates for the credit grade to be a red flag aren't going to bid on an AA at 19%, so the loan stagnates there.  My guess is that in your anomaly, you're not finding AAs at 29%, you're finding AAs at, what, 16%?  19%?  If so, that would show what I'm talking about. 


 

[lenderguy]

My point is that even being willing to *list* at a high rate is a red flag.  Plus, those who list at extremely high rates are less likely to get bid down to normal rates;

Are  you sure that's true?  I thought a 29% AA was just an invitation to pile on?  Or, are most people like me -- the few times I actually manually bid, I stayed away from those high loans cause I was always sure they'd get bid below my threshold.  But, if enough people think like me, the bidding takes longer to start, and the potential for bid-down diminishes.

It just takes longer to get bid down from 29% to 9% than it does to get bid down from 16% to 9%, especially if the loan amount is large.  Think about it, first the loan has to get fully funded in the first place, which takes a while, then there's that extra 10 percentage points it has to get bid down.  The listing only has 10 days for the bidding to happen.  I think there are some bidders who bid on ANY loans at 29%, and their bids generate early activity, but once they're bid off, they're not going to bid again at 19% or whatever.  And the lenders who consider unusually high rates for the credit grade to be a red flag aren't going to bid on an AA at 19%, so the loan stagnates there.  My guess is that in your anomaly, you're not finding AAs at 29%, you're finding AAs at, what, 16%?  19%?  If so, that would show what I'm talking about. 

There are about 25 AA loans with a rate at or above 18%.  There is even one at 29%.

[Caladia]

There are about 25 AA loans with a rate at or above 18%.  There is even one at 29%.

They're being funded by those bidders who look for the high rate loans, disregarding the red flags, and they're not getting bid down.  And I bet these high rate AAs are more likely to default, for the reasons described above.

[Staneslav]

A