Posted by Lending Club :: June 11, 2007 @ 12:36 pm

A few press articles such as this one have been published recently about practices that artificially increase the FICO score of certain borrowers. We have kept an eye on this issue and agree with this opinion:

Ginny Ferguson, a mortgage broker in Pleasanton, Calif., and a credit expert for the National Association of Mortgage Brokers, considers the practice mortgage fraud, and the trade organization is about to release a policy statement against it. "These companies are encouraging consumers to commit fraud," she said.

While the FICO score remains one of the best indicators of a borrower’s credit-worthiness, other factors are always used by banks and p2p lending companies to assess risk, including income, debt-to-income ratio, etc. At Lending Club, we are going one step further. We are creating a consumer’s “social credit score” that takes into account standard measures, like FICO score and other factors usually used by banks, as well as social measures, such as the connectedness of lenders and borrowers.

We believe a member is more likely to pay their debt on time when that member borrows from a community of people they know, or feel connected to. Lending communities typically experience fewer defaults than banks because they are founded on the premise that people are less likely to default to a community of people they feel close to versus a faceless bank. As always, we’d love to hear your feedback on this idea: is social credit scoring worth exploring? Are we going in the right direction? Let us know what you think.