Posted by Renaud Laplanche :: June 20, 2007 @ 7:51 amWhile we have many reasons to rejoice about how things are going on Facebook (watch out for our next announcement tomorrow), we wanted to share with the community an issue we are now facing as we start looking into the numbers.
We have processed over 238 loan applications in the last 3 weeks, out of which we have listed 79 approved loan applications, or roughly a third of all loan requests. Should we be concerned about this low approval rate?
Our goal is to make peer-to-peer lending mainstream. So mainstream that ten years from now, carrying a credit card balance or taking a personal loan from a bank will seem like an odd thing to do.
We believe peer-to-peer lending can realize its mainstream potential only if it is easy, safe and private. In an effort to make p2p lending safe, our credit policy sets high standards for approval of a loan listing: FICO score above 640, and debt-to-income ratio under 21% (not including mortgage). This policy has caused the exclusion of 2/3 of the loan requests received on Facebook so far.
We believe in free market and free determination, but we also believe that interest rates and credit risks are complex in nature, and not entirely governed by market forces: for example, as credit risk increases, interest rates cannot always keep up with that risk, due to state limitations, usury rates and other regulatory constraints.
So we believe we’re doing the right thing in setting up stringent credit criteria in an effort to protect our community of lenders and borrowers. Nonetheless, we founded Lending Club on the premise that we will help as many people as possible. In that perspective, a 33% approval rate is not fully satisfactory. We strongly believe the Facebook community is an ideal environment for peer-to-peer lending and tomorrow’s announcement will further establish this belief. We found it important and useful nonetheless to share the issues as much as the good news.
We do not have a solution yet, but wanted to share the problem. As usual, we’d love to hear back from you.
Renaud from Lending Club
8 Comments
How does this compare to the aproval rate of comperable services? Is that good or bad? Hmmmm... glad you're posting on this, points for transparency and asking your community.
Thank you Marshall for your comment. The 2 most similar services (Prosper in the US and Zopa in the UK) handle things differently:
Zopa filters borrowers based on credit score and other factors but I haven't found information on their approval rate.
Prosper has a different approach, and lets the market decide for the most part: anybody with a 520 FICO score or above
can apply for a loan, and lenders decide to fund them or not. Both approaches certainly have their merits.
We think P2P lending is still very new and can be somewhat intimidating to potential lenders, and having stringent credit
criteria helps build up confidence. The other aspect is regulatory constraints such as maximum interest rates, which make the
market less efficient for the lower FICO scores. I think part of the issue is "how do we help those borrowers that we don't approve
for listing?". We're exploring several options, hoping to come up with something truly useful in the next few weeks.
I don't know much about finance, but the borrower with lower credit could have some options, instead of the current Yes or No approval situation ...
1. They could prepay a part of the loan, as long as they were willing to wait for the loan, this would help reduce the risk.
2. They could borrow less than the minimum allowed if that was useful to the borrower.
3. They could borrow smaller sums in installments, a series of loans, if that was useful for them.
It all depends on how much the borrower needs at a time, and for how long.
Thank you Apu; these are well great suggestions! We are looking into some of these options, including lowering the minimum
loan amount (currently $1,000), which we believe is too high. There are regulatory constraints regarding minimum and
maximum amounts in some states, so we are carefully looking into what can and cannot be done in that respect.
But lowering the minimum amount, and some other options you raised, would definitely help qualify more people. Thanks!
But my issue is I have decent credit but no one will give me a loan for $10,000. Lending club said I cannot be verified. What is that all about?
Stacy, if your credit score is above 640 and your debt-to-income ratio is under 21%, we should be able to list your loan on Lending Club.
The message you received means that your identity could not be verified. We verify identity based on Social Security Number
and by asking a few questions that only the person with that SSN would know the answer to. Let's take this offline: I will ask customer
service to contact you tomorrow, and if you pass the credit criteria there should be no problem getting you in. Best, Renaud
I feel that the idea of social credit is that the community will support (moral if nothing else) and shame ( egg on ) the
lender to be responsible. But if the community does not know about the loan, how will this occur?
Perhaps some sort of "social credit score" can be developed which takes into account the quality of the lender's
support network. Are any very creditworth themselves ( permission could be ascertained for to determine that).
Would they recommend the person? Is the lender willing to allow broadcasts of their loan status to these people - good news
and bad? These could include friends, parents friends, etc. This makes it more personal.
Perhaps this would allow a somewhat larger group to quality, those who have good connections and reputation but haven't proven
themselves yet. When starting out, sometimes that's all you have but it is a pretty good indication of your potential.
Larry,
This is a great suggestion, very much in the direction we're going. We are looking at ways to also take into account the "trustworthiness" of
borrowers outside of (and in addition to) traditional credit scores, as long as we can clearly separate the "subjective" information from
the credit data and identify both as such to the lenders. Endorsement by a lender is certainly an option, but we need to be careful of potential
collusion between a lender and borrower, which could be damageable to the community. We are also looking at "portable" reputation
systems such as Rapleaf that can help establish trustworthy user ratings.
Thank you again for your suggestion Larry, this is helpful!
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