A custom risk score was built using historical Prosper data to assess the risk of Prosper borrower listings. The output to Prosper users is a Prosper score which ranges from 1 to 11, with 11 being the best, or lowest risk, score. The worst, or highest risk, score, is a 1. Unlike a credit bureau score, which is based on a much wider variety of loan performance, the Prosper score is specifically built on the Prosper borrower and applicant population. As such, the credit reporting agency score should, and does, rank order risk on the Prosper population, but is not as discriminating as the custom score. Prosper uses both the custom score and the credit reporting agency score together to assess the borrower’s level of risk and determine estimated loss rates. The loss estimates are based on the historical performance of Prosper loans to borrowers with similar characteristics. They are not a guarantee and actual performance may differ from expected performance.
The Prosper score estimates the probability of a loan going “bad,” where “bad” is the probability of going 60+ days past due within the first twelve months from the date of loan origination. Applicants from April, 2008 through April, 2011 were used to build the discrete additive scorecard. The scorecard was verified and results validated on an independent validation sample of loans booked during the same time period as well as a more recent sample of loans booked outside of the loan development period.
All potential variables available at the time of listing, including those from the identification authorization process, the credit report, and listing details provided by the borrower were analyzed for potential inclusion in the final scorecard. For example, variables such as authorization score (used during identity verification), income, debt-to-income ratio, total revolving balance and delinquencies were reviewed. Transformations to refine the variables were performed during the development process. Variables were dropped or kept in the final scorecard based on their contribution and stability over time.
Key variables in the scorecard are:
- Number of inquiries on the credit bureau
- Number of delinquent accounts on the credit bureau
- Credit card utilization on the credit bureau
- Number of recently opened trades on the credit bureau
- Debt to income ratio
- Loan payment performance on prior Prosper loans