Author Topic: The Fed's study on LC's loans to small business (Feb-2014)  (Read 4059 times)

Fred

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The Fed's study on LC's loans to small business (Feb-2014)
« on: February 17, 2014, 03:11:13 AM »
To the geeks among us.

http://www.federalreserve.gov/pubs/feds/2014/201410/201410abs.html

1. "... logistic regression results that control for the quality of the application show that, holding all else constant, applications for a loan for a small business were almost twice as likely to have been funded than loans for other purposes."

2. "Focusing on funded applications, we note that funded business loans were slightly larger on average than loans funded for other purposes but paid similar interest rates."

3. "Regression results that control for application quality show that peer-to-peer loans for small businesses were charged almost a percentage point interest rate premium over non-business loans."

Most importantly:
4. "Logistic regression results that look at loan performance indicate that loans for small businesses were much more likely to be delinquent or charged off."

===

Abstract:

Finance and Economics Discussion Series

Peer-to-peer lending to small businesses

Traci L. Mach, Courtney M. Carter, and Cailin R. Slattery
2014-10


Abstract: The current paper examines loan-level data from Lending Club to look at peer-to-peer borrowing by small businesses. We begin by looking at characteristics of loan applications that were and were not funded and then take a more in-depth look at funded applications. Summary statistics show an increasing number of small business loan applications over time. Beginning in 2010—when consistent measures of loan purpose were recorded for all applications--loan applications for small businesses were on average less likely than loans for other purposes to have been funded. However, logistic regression results that control for the quality of the application show that, holding all else constant, applications for a loan for a small business were almost twice as likely to have been funded than loans for other purposes. Focusing on funded applications, we note that funded business loans were slightly larger on average than loans funded for other purposes but paid similar interest rates. However, relative to small business loans from traditional sources, peer-to-peer small business borrowers paid an interest rate that was about two times higher. Regression results that control for application quality show that peer-to-peer loans for small businesses were charged almost a percentage point interest rate premium over non-business loans. Logistic regression results that look at loan performance indicate that loans for small businesses were much more likely to be delinquent or charged off.

Keywords: Peer-to-peer lending, small business, alternative small business borrowing, lending club

Full paper (453 KB PDF)
http://www.federalreserve.gov/pubs/feds/2014/201410/201410pap.pdf
Last update: February 5, 2014

Rob L

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Re: The Fed's study on LC's loans to small business (Feb-2014)
« Reply #1 on: February 17, 2014, 01:45:05 PM »
A quote from within the paper:
Quote
The results indicate that after controlling for observable differences in the quality of the borrowers, loans for small businesses were more than 250 times more likely to perform poorly than loans for other purposes, which may give some insights into why such loans are charged a higher rate. The other covariates in the model behave as one would expect.

250 times?? Zowie.

Fred

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Re: The Fed's study on LC's loans to small business (Feb-2014)
« Reply #2 on: February 17, 2014, 02:09:41 PM »
A quote from within the paper:
Quote
The results indicate that after controlling for observable differences in the quality of the borrowers, loans for small businesses were more than 250 times more likely to perform poorly than loans for other purposes, which may give some insights into why such loans are charged a higher rate. The other covariates in the model behave as one would expect.

250 times?? Zowie.

Sometimes we do have free lunch (useful research from government/academia) -- no royalties to use their products.

Time to adjust our risk models.

Bohb Daishi

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Re: The Fed's study on LC's loans to small business (Feb-2014)
« Reply #3 on: February 18, 2014, 02:13:02 AM »
A quote from within the paper:
Quote
The results indicate that after controlling for observable differences in the quality of the borrowers, loans for small businesses were more than 250 times more likely to perform poorly than loans for other purposes, which may give some insights into why such loans are charged a higher rate. The other covariates in the model behave as one would expect.

250 times?? Zowie.

If I read this correctly, the report states that the 250 times is not the likelihood of charging off. Rather, it's the likelihood that a loan will go delinquent. Big difference.

Quote
All covariates are as defined in the interest paid regression and the dependent variable is a dummy variable equal to one if the loan was charged off, in default, or 31 to 90 days
delinquent
. In addition, the model included state fixed effects.

Results from estimation are in Table 10. The results indicate that after controlling for observable differences in the quality of the borrowers, loans for small businesses were more than 250 times more likely to perform poorly than loans for other purposes, which may give some insights into why such loans are charged a higher rate.
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LonghornSF

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Re: The Fed's study on LC's loans to small business (Feb-2014)
« Reply #4 on: March 07, 2014, 02:21:03 AM »
Business loans are some of the riskiest loans on LC right now. No surprise there. Personally, I won't touch loan that has any indication of being a business loan. LC's underwriting model just isn't geared towards handling these loans (for now).