A Dive Into The Lending Club Data

Hey, i'd love to have a chat. PM me at clement@100mdeep.com and let's talk

I operate an online crowd-lending analytics and automation platform PeerCube https:/www.peercube.com. I have been analyzing both Lending Club and Prosper data for my institutional clients for almost 4 years now. While OP made a good first attempt on analyzing the data, the analysis suffers from two major shortcomings that I normally see from people getting started with data analysis.

1. Domain Knowledge: Novice analyst tend to put the data in a blender and see what comes out first instead of building some preliminary knowledge and intuition about the domain. This is quite evident in OP's analysis and finding about annual income. A person familiar with domain will ask the question "Why would a borrower with high annual income will borrow a small amount loan at high interest rate?" This right away will raise flags about risks of lending to such borrowers. OP will benefit by reading some of the publications (books, research) on credit scoring and modeling before deep diving into analyzing Lending Club data.

2. Data Exploration: Not spending enough time exploring the data can lead to erroneous conclusion like The second chance strategy. When did Lending Club start issuing loans to borrowers with delinquencies and public records has a big impact on returns as newer loans are not aged enough to have sufficient defaults.

> Watch for your average return (expected return), consistency of returns through time (risk), while making sure there is enough supply (liquidity) on the platform to deploy your strategy.

Time is not Risk. You need to find a proper measure for risk. Also consider negative kurtosis and frequent low positive returns but a few high negative returns nature of return distribution.

> I considered that investors deploy and re-invest their money continuously on the platform and therefore own a portfolio with different ‘vintages’ of loans. The ROI that are computed reflect this, as they are average returns across vintages.

Re-consider this argument of "average return across vintages" being representative of investor returns. Tip: look at loan volume across vintages as well as typical re-investment pattern of a typical investor.

> Please also note than due to the low issuance volume in the early days of the platform, the returns computed for the pre-2010 period are much less reliable than the post-2010 returns.

Please don't do this. The data between 2006 and 2010 is the most valuable due to the business cycle we were in at that time. The data since 2010 tells nothing about how loans might perform in the future when business cycle is not as good it has been in last few years.

OP will really benefit from re-evaluating his finings with critical eyes. I will suggest gaining some domain knowledge, spending lot of time on just exploring the data before start drawing definite conclusions, focusing on distributions, correlations and statistical significance.

If you only focus on return, you will draw erroneous conclusions. The upper limit to return is restricted by the interest rate. An A grade loan that carries interest rate of 5% will never give you return of 10% while a D grade loan carrying 18% interest rate has some chance of giving you 10% return, assuming you hold loans to maturity. If you only consider returns, your findings will always be biased toward high interest (supposedly high risk) loans. Similarly, the return comparison across vintage will generate erroneous conclusions.

You need to take into consideration Interest Rate and Default/Loss Rate while considering the validity of the relationship.

The Employment Length on its own is a poor indicator (statistically insignificant). You need to at least combine employment length with credit age (when the first credit line was opened) and Income to improve predictability.

There is no vintage of Lending Club 5-year term loans that have fully matured. The first 5-year term loan was issued in early 2010 (IIRC, May) so the first vintage is just coming up to full maturity.

  Interest Rate (Rate of Return)
  = Real risk-free interest rate 
  + Inflation premium 
  + Default risk premium 
  + Liquidity premium
  + Maturity premium

You need to determine whether you are being compensated on 5-year term loan for potential change in inflation, higher default risk, and longer maturity over 3-year term loan.

I have some details somewhere on my drive. PM me and we can talk

Banks haven't proven too skilled in estimating risk (see 2007). The average Lending Club lender is surely worse than the banks, but the best ones are surely better.

Net it all out and hopefully we get a Darwinian marketplace for lenders, lenders who don't need acres of employees preparing powerpoints for each other in class A office space.

Of course, the true measure of estimating risk is hidden until a crisis occurs. Interesting to see where it all ends up.