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Transplant Athlete
Thursday, August 26, 2010
  Lending Club 3

Update: Now that Lending Club has raised their loan limit, these numbers have all changed. So, please don't rely on these results. You can follow the methodology to perform your own analysis on the new data.

Before I start, let me say, I am doing my best to provide accurate information, but it's possible that I might have missed something, so perform your own analysis before you invest your money with Lending Club (or consult a professional). I am providing the following to illustrate how I look at the data.

If we take a look at the G1 Loan grade (remember from the Lending Club Part 1 post it had a low 10% default rate versus the G2 grade at 32%), we have approximately 49 loans (I didn't count removed or expired). That is a very small number, so it is hard to draw accurate conclusions. Also, the data covers a span from 9/07 to the present and as we all are painfully aware, the economy TANKED during that time period and may not be representative of future performance.

I copied and pasted the G1 loans to their own sheet. I looked over the data for anything obvious. If we look at Home Ownership versus Renting, we had one renter charged off. The loan was made in 2007 and the borrower made roughly 14 payments. Since then, there have been 5 other charge offs by homeowners (5/6=83%). Renters account for 38% of the fully paid loans and about half of the current loans. Can we infer from this data that it is safer to loan money to a renter in the G1 loan grade?

If we look at Average Monthly Income, borrowers who've fully paid their loans on AVERAGE have higher incomes. I would not use this as a decision point. There are two charged off loans where the borrowers make less than $1200 per month (I might avoid borrowers in the G1 Grade that make less than $1500 per month, but I wouldn't necessarily look for the highest earners - If you saw the income distribution you would see why. Averages can be misleading).

How about Debt To Income Ratio (DTI)? ON AVERAGE, borrowers who have paid their loans off have lower DTIs. The average DTI for charge off was 21.2% and for fully paid was 18.7%

Surprisingly, there were no public records in the Charge-off group, but there was one in the fully paid group. I've been under the impression that you should never invest in someone who has had a public record (it's usually bankruptcy or divorce, both of which decimate a person's finances). How about delinquencies? This is interesting. The fully paid group had no delinquencies in the past two years. How about credit Inquiries? On average the Fully paid group had more inquiries (3.63) versus the charge off group (1.67).

How about Loan Purpose?

PurposeDebt RefiBusinessMedicalHome ImproveOther (Car/move/Educ.)
Charged Off32100
Default00000
Paid42101
Current176015
Late21000
Issued30000

If we look at the medical category, 1 loan fully paid off and 1 got charged off. In the Business category: 2 loans paid off, 2 loans charged off, 6 current. Debt Consolidation (and credit card refinance): 3 charged off, 4 paid off, 17 current.

Based on this LIMITED data, If I were investing in G1 loans, I would only look at debt refinance loans, with low DTI ratios (4 or 5%), with monthly income above $1500, and zero delinquencies in the past 24 months, I would eliminate anyone with zero credit inquiries in the last 6 months, and I would give preference to renters, but I would not eliminate homeowners.

That's a good start, but you have to check over the credit report for things that might skew your results. Someone could have zero delinquencies in the past two years because they've only had credit for one year. Their credit report may show a very low revolving credit balance and consequently a very low DTI, but they are asking for the maximum because they've got debts that haven't been reported to the credit agencies.

One more thing, If you look at the charged off loans, Borrowers on AVERAGE made 13 payments before calling it quits. On a $25 loan, you'd be paid on average $11.64 in principal + interest, in other words not a total loss (yes, I'm a cup half full kinda guy). Also: Of the fully paid loans, all of them were paid off significantly sooner than the 36 month term (on average around 15 months). The earliest of the CURRENT portfolio should start reaching maturity early next year, which means we should have better data then. Later today, I will add the loans that are close to maturity to this analysis to give us a few more data points.

Addendum: It is important to note that this analysis ONLY pertains to a G1 loan with a 36 month term. There are a couple of issues with the 5 year loans:
1) LC just started issuing them a couple of months ago, so there is no data on how they'll perform. As we have seen, G1 borrowers who default do so on average 13 months into the loan. It will likely be July of next year before we see how well the 5 year loans will perform.
2) G1 borrowers who choose a 3 year term are different than G1 borrowers who've chosen a 5 year term.
3) Payments on a 5 year loan are lower than the 3 year loan, this may help, but we don't know yet.

 

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Comments:
So far, I've shown how to develop a kind of template to start winnowing through the hundreds of loans on Lending Club.

The next thing to do is to do a statistical analysis to find which variables CORRELATE to better performance. As I've said, it's been awhile, so I may need some time to work through the equations and all that data...
 
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I've gone through kidney failure twice. The first time in 2000, my mother donated a kidney; and again in 2008, I'm on dialysis waiting for a breakthrough in immuno-suppression medicines before seeking a new kidney.

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