Zopa revamps credit risk assessment model
ZOPA has improved the way it assesses the credit risk of borrowers to include more recent data.
The peer-to-peer lender said on Friday that it has launched a new “credit risk scorecard” to assess potential borrowers.
“Our new model mixes proven traditional techniques with more cutting-edge data science approaches that new technologies have unlocked, and replaces our previous model that we launched in April 2015,” said the firm in a blog post on its website.
“The new model not only uses more advanced techniques, but is also built on more data, and more recent data – all of which means it improves our ability to assess loans in today’s market.”
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In August, Zopa reduced its exposure to higher-risk loans due to the UK’s deteriorating consumer credit outlook, leading it to lower its expected returns on some investments. It also said that it predicted higher defaults on existing loans.
At the time, the company referenced publicly available data that suggested consumer default and insolvency levels are reaching levels which are more consistent with historic norms prior to 2010.
Zopa said on Friday that it continues to monitor leading macroeconomic indicators carefully, as well as its own loan performance.
“The trends in the wider UK market we mentioned last month, like levels of defaults and personal insolvencies, remain evident,” it said. “Within Zopa, our outlook for loans remains the same as our last update, meaning our expectations have not changed since August.”
Zopa also gave an update on how it will manage risk on loans not covered by its provision fund – called the Safeguard fund – once it retires the Access and Classic accounts, as part of its previously-announced restructure of its account range. It is winding down the Safeguard fund entirely by 2022.
Non-Safeguarded loans accounted for 64 per cent of the whole Zopa loan book as of the end of last month, the firm said.
“Our principles remain the same, regardless of Safeguard,” said Zopa. “We still believe in prudent risk policies, diversification, and effective collections and recoveries policies.
“As our expectations of defaults increased, we have increased our prices, so that the returns we target for investors in each risk market remain the same. Given the current climate, we’ve increased the mix of lower risk, lower return A-B loans in our products, which is why our target rates reduced.”