Using five years' worth of data science and machine learning, Harmoney is now able to update our scorecard to more accurately predict borrower risk. This allows us to review interest and default rates, and lending limits.
While our upper and lower interest rate limits (6.99% - 29.99%) remain unchanged, interest rates for risk grades B1 to F4 have all been reduced. Find the full table of new interest rates below.
Borrowing limits on B1-F5 grade loans have also increased by $5000 in each grade.
Scorecard 1.6 is Harmoney's third iteration of its assessment, following the scorecard used when the company launched in 2014, and Scorecard 1.5 launched on the platform in 2017. The changes are not an indication of any issues with previous scorecards, simply that with more data the accuracy of the assessment process can be improved.
What is changing for lenders?
Once released Scorecard 1.6 will introduce the following changes:
- Increase accuracy of pricing risk significantly from Scorecard 1.5
- The probability of a default for each grade will change marginally
- Borrower interest rates will reduce across risk grades B1-F4. The minimum rate will remain 6.99% p.a. and maximum rate will remain at 29.99% p.a.
- The maximum loan limits are being increased in grades B1-F5. However, it is important to note that individual affordability testing will not change.
- There will be a 60-day period in which the platform will list some loan applications that have been assessed and priced using the previous scorecard (Scorecard 1.5) as well as some other loan applications that have been assessed and priced using the new scorecard and pricing model. This is because borrower approvals remain valid for up to 60 days.
Once released, all new loan applications will be assessed using Scorecard 1.6
The new scorecard in more detail
We regularly review our policy and process with regards to underwriting risk. Harmoney has a data science team tasked with producing analytical work to improve the quality of the decisions Harmoney makes in the approval and risk grading of potential borrowers who list their loans on the marketplace. Read more about investment risks.
The scorecard (short name for 'credit scoring predictive model') is an important part of the process of underwriting risk. It takes borrower data and runs it through an algorithm to give each borrower a credit grade with an associated interest rate and a probability of default. The current borrower scorecard (1.5, launched in 2017) is being replaced by a new scorecard (1.6) to provide a greater degree of accuracy in determining the borrower's risk grade. We have taken loan performance data from tens of thousands of loans and used machine learning to create this improved scorecard.
The scorecard calculates for each borrower a probability of default (pD). The pD in turn is mapped to a Harmoney subgrade, e.g. C5, which has an associated interest rate and maximum limit. The mapping of pD's to grades is changing marginally compared to scorecard 1.5.
Summary of changes
- Updating borrower interest rates, loan limits, and the probability of default. With the 1.6 version of the scorecard borrower interest rates, loan limits and default rates are being updated.
- Updating borrower interest rates. The 1.6 version means that the interest rates for all grades have been re-calibrated, with a minimum and maximum rates unchanged (6.99% - 29.99%). This combined with the improved accuracy of the new scorecard providing greater certainty that borrowers have been graded correctly means that interest rates can be adjusted. The new lower interest rates should result in a higher volume of loans available to lenders for investment.
- Increasing borrower loan limits in most grades. Borrowing limits for all B1 to F5 grade loans have also increased by $5000 in each grade.
- Update to the annual Probability of default (pD) for risk grades. The probability of default rate (pD) is the forecast probability that a loan will default with no further repayments are expected to be received. A different rate is assigned to each risk grade. The pD rate is shown as an annual rate to enable comparison to the annual interest rate Learn more about pD rates here. The annual pD rates have been re-calibrated to the forecast default rates for each grade with the new scorecard.
|Risk grade||Borrower Interest Rate p.a.||Forecast Probability of Default p.a.||Grade Limit|
Comparing interest rate and PD for Scorecard 1.6
This comparison below takes the entire population of new loan applications received for version 1.5 of the scorecard and run it through the 1.6 version. It then compares the resulting weighted average portfolio of loans under each version. Note: the interest rates and PDs are a forecast and may not be a good indicator of your future returns. The actual change in return as a result of the scorecard version change will depend on your lending criteria and what mix of risk grades you lend to, and your applicable Lending Fee.
|Interest Rate p.a.||19.64%||17.82%||-1.82%||Lower borrower interest rates reflect increased scorecard accuracy and a lowering of expected credit default by grade.|
|Probability of Default p.a. (pD)||2.33%||1.70%||-0.63%||The lower forecast losses due to charge off will reduce due to better prediction of loss.|
Why do I need to turn my Auto-Lend back on? You need to do this as the lending parameters are changing (interest rates, loan limits, pD rates) and Auto-Lend will be de-activated when this occurs. You should only turn Auto-lend back on if you are comfortable lending under the new parameters.
Why are borrower interest rates being reduced? The new scorecard has re-calibrated the risk grades and the type of borrower in each grade. This combined with the improved accuracy of the scorecard provides greater certainty that borrowers have been graded correctly. It also means that interest rates can be sharpened. These should result in a higher volume of loans benefiting more borrowers and lenders.
Is a borrower that is a C3 in the old scorecard the same as a borrower that is C3 under the new scorecard? Scorecard 1.6 has re-calibrated the risk grades so a C3 borrower under the old scorecard is likely to be different to a C3 under the new scorecard. This is reflected in the interest and pD rate.
Do these changes apply to institutional lenders as well? They apply to all loans and therefore to institutional and retail lenders alike.
How will the changes affect re-writes? All loan re-writes that are applied for once the new scorecard is implemented will be subject to the new Scorecard 1.6 interest rates. Credit limits on new loans will now be the same as those offered on re-write loans. (Re-write loan limits on most risk grades were increased in May 2019)
If a borrower adds Payment Protect to their loan – will this have any bearing on their risk grade? No, it will not.
How will this affect my current Auto-Lend settings? The interest rate and default rate filters are being re-calibrated for the new interest rates and default rates. Before turning Auto-Lend back on you should review your settings and the new interest rates and default rates and turn Auto-Lend back on only if you are comfortable lending under the new parameters.
Do these changes affect my existing portfolio? The changes apply to new loan applications only. Existing loans in your portfolio do not change in any way.