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Don’t Just Auto Invest - Proving Systematic Bias at LendingClub

Started by Peter, July 30, 2018, 11:00:00 PM

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dacoinminster

Hi! Brand new account on this forum - I hope this is the right place to post this.

I spent the past few weeks diving deep into LendingClub's historical data, and found that they seem to be systematically mis-rating loans. This seems a gift to hedge funds at the expense of retail investors. Perhaps you guys are already well aware of this, but I found it pretty surprising.

Here's my analysis: https://medium.com/@jr.willett/dont-just-auto-invest-proving-systematic-bias-at-lendingclub-c9a9122ec8c1" class="bbc_link" target="_blank">https://medium.com/@jr.willett/dont-just-auto-invest-proving-systematic-bias-at-lendingclub-c9a9122ec8c1

I'd love to hear what you guys think!

pressure9pa

Good read - thanks for posting.

I've avoided renters since the opening of my account 2-3 years ago.  My only thought was that if we came into an inflationary environment where returns that once looked decent suddenly looked poor, those borrowers with a hard, generally appreciating asset would at least default less frequently than originally predicted and thus perhaps slightly raise the return more than expected.  I guess I was lucky that the logic behind my selection never really came into play, but the filter worked.

FWIW, my account is ~28 months old, about 75% in B's & C's, and the only consistent filter I've used is home ownership.  My annualized return is at 5.66%, which while not great I think is decent considering my entry timing into this market couldn't have been much worse.

arcee49

As far as the income verification loans are concerned, see this thread: https://forum.lendacademy.com/index.php/topic,2945.msg26788.html#msg26788" class="bbc_link" target="_blank">https://forum.lendacademy.com/index.php/topic,2945.msg26788.html#msg26788

AnilG's theory is simply that lower quality loans are the ones that would require their income to be verified.

I also seem to remember an interview done (probably the Lend Academy Podcast) with someone in P2P lending, maybe even LC.  They basically said the same thing as AnilG.  In addition to that though, they commented that with good borrowers they didn't want to bother them with the hassle of verifying their income and potentially losing their business.

rubicon

lendingclub is also subject to ECOA, which legally prohibits it from discriminating among certain borrower pools. The most common example is zip code, which could be a proxy for race.


also, hedge funds can value their portfolios in one of two ways:
- mark to market e.g. based on current interest rates
- held to maturity (not subject to mark to market) but starting off with a loss reserve and making write-ups or write-downs when there's evidence the loss reserve is too conservative or too aggressive. This smooths out the returns stream over time and mitigates the impact of returns coming down over time that retail investors see in their accounts as retail accounts only get mark-down when there's an actual credit event.


TravelingPennies

Thanks guys. The ECOA angle is very interesting. Funny how regulations can create perverse outcomes sometimes.

AnilG

Good analysis. Why and how did you decide to pick homeownership, unemployment, and verification attributes for analysis?

You most probably wil have different explanation if you used covariance matrix to select attributes to be analyzed. I believe your findings can easily be explained using income attribute. Borrower Income has the largest influence on loan performance. High income borrowers (except unusual/incorrect  income numbers reported) likely to have mortgage (not rent), employed, and income not verified.








TravelingPennies

Remember that some variables can be predictive for returns but illegal for Lending Club to use in underwriting.  Cannot use variables that impact protected classes and other consumer protections
https://www.fdic.gov/regulations/compliance/manual/4/iv-1.1.pdf" class="bbc_link" target="_blank">https://www.fdic.gov/regulations/compliance/manual/4/iv-1.1.pdf


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