Saturday, April 25, 2009

Pertuity Direct clarifies underwriting philosophy; discloses loss assumptions

Peer to Peer lenders have a little more information readily available now from P2P Mutual Fund Pertuity Direct. This month, Pertuity Direct has updated it's online credit policy and disclosed loss assumptions.

As you may know, mutual funds are prohibited from projecting potential returns. A savvy investor now has a little more information available from Pertuity's updated credit policy. PD has added loss assumptions by FICO band, which makes an interesting read for people who like to crunch numbers. Default predictions range from 2.7% to 6% based on credit grade. PD has maintained the requirement for a minimum FICO score of 660 and no more than 40% debt-to-income ratio.

Here is the complete, newly published underwriting philosophy:

Our Underwriting Philosophy

At Pertuity Direct, we evaluate an applicant's eligibility for a loan and determine the interest rate of that loan based on the following criteria:
  • we do not overextend a borrower with new debt
  • approved borrowers are offered low market interest rates
  • lenders in the community preserve their investment capital and earn a competitive return

These goals can be met by ensuring that each borrower's financial situation is reviewed with regards to their willingness and capacity to pay and an appropriate decision rendered.

In recent times, some financial institutions have suffered because their credit policies began to ignore key components to underwriting a healthy loan portfolio. Pertuity Direct does not solely rely on a credit score or whether the loan is secured against home equity. What we do is use a mix of human review, statistical decision making, and verifications to make sure that we deliver the right product to the customer. In some cases, that may mean that we are not able to approve a borrower due to the fact that we do not charge usurious interest rates to compensate for high risk, nor will we lend to a borrower who we feel we may endanger with over-indebtedness.

An additional strategy to ensure the health of the portfolio involves making conservative assumptions regarding the default risk of the underlying assets. Both eligibility decisions and interest rate assignment are driven from the estimated risk of new bookings, and Pertuity Direct has taken a conservative approach. For example, for the prime and super-prime segment that we are targeting (average approved borrower FICO to date is about 740), our pricing policy has built in the following expectations for default risk (based on a $12,000 loan):

  • 660 – 700: 6.0%*
  • 701 – 750: 3.8%*
  • 751 – 850: 2.7%*

*default risk is annualized in the form of balances defaulted over balances outstanding

We believe that transparency is important so our borrowers can understand what affects loan eligibility and investors can understand how we generate the assets in the loan portfolio. To that end, below are some of the criteria used in our underwriting. We welcome any feedback from borrowers or investors which can be sent to underwriting@pertuitydirect.com.

Underwriting Criteria
  • A debt-to-income ratio generally below 40%
  • We often require proof of income in the form of documents, especially for larger loan sizes
  • A minimum credit score (FICO) as reported by the Experian credit bureau of 660 or higher
  • No bankruptcies within the past ten years and no more than one public record in the past ten years
  • An established credit history at least two years long with five total accounts
  • No current delinquencies on any trades

In addition to these criteria, Pertuity Direct also looks at factors such as number of recent inquiries, loan size in relation to income, amount of recent debt opened, number and type of mortgages held, and credit card balances as a ratio to available card lines.



Jessica Ward is a freelance writer based in Seattle. She also blogs at www.pennywisefamily.blogspot.com.

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