Monday, September 24, 2012

PeerCube: Founders' Loan Filter for Lending Club

Since the release of PeerCube about two weeks ago, I have learnt a lot from the feedback and input of PeerCube users. Please keep your comments coming ...

Steep Learning Curve with P2P Lending

As seasoned P2P lenders, sometimes we forget how much of a learning curve is there for a beginner peer to peer lender. While the new lenders may be familiar with stock/equity market, the knowledge of debt/bond market and credit report data analysis is non-existent or at best rudimentary.

During development of PeerCube, we were concerned about our decision to not include loan parameters that are accessible only with authentication at Lending Club site. But after almost two weeks of usage on PeerCube, we can observe that even the twenty nine parameters we presented are overwhelming and confusing for new peer to peer lending investors.

I believe we can help such lenders through education and simplifying loan selection process. Here, I see the benefits of education initiatives for new peer to peer lenders that Peter Renton has taken with his Social Lending site. At PeerCube, we want to do our part in lowering the barriers to loan selection and investing by beginner P2P lenders.

Starter Pre-tested Loan Filters

Typically, it is very difficult to get started with a blank piece of paper. The same behavior we noticed at PeerCube. While the seasoned lenders are missing the ability to use advanced parameters and perform various calculations, the beginner lenders are finding the task of prioritizing and selecting from over two dozen available parameters insurmountable.

We would like to help beginner lenders overcome the "blank paper" barrier by providing a set of starter and pre-tested loan filters. We also would like to offer guidance for developing suitable lending strategies. To meet these objectives, we have decided to release the loan filter Mrs. RT and I use for selecting loans on Lending Club. In future posts, I will also discuss how we developed and tested this filter while educating the readers on various filter parameters.

Even though quite a few P2P Lending Blogs disclose their loan selection strategy online, the beginner lenders may not be aware of such information. We believe compiling such information at one place and in easy to use format will go a long way in helping and growing P2P lending community. To achieve this vision, we will be reaching out and requesting permission from such bloggers to convert their published loan selection strategies for use on PeerCube. These filters will be offered to PeerCube users as starter loan filters that they can modify and save for their personal use.

Founders' Loan Filter (FF)

Some users may have already noticed a new green button "Founders' Filter" on PeerCube Filter page. Clicking this button will take users to filter parameters page with appropriate parameters already selected. Users can either use this filter as-it-is or modify to their liking and save the modified version for future use.

We have been developing and refining the Founders' Filter (FF) for almost a year. The published version is our latest revision, the 21st. The FF is based on our analysis of historical loan data from Lending Club and subsequent revisions were made to exclude the loans that didn't match our expectations of quality loans that appeared in the results of original filter.

Most investment strategies caution that past performance may not be representative of future results. This caution also applies to FF. We believe that FF offers a conservative lending strategy on Lending Club but we can not be sure of its suitability for every user. Please use FF as the starting point and at your own discretion.

FF Lending Criteria

Listed below are the conditions that FF uses to filter loans available on Lending Club platform.
  • Loan Amount Requested: $5,675 or higher,
  • Loan Grade B, C, and D. Sometime we include grade A loans when very few loans show up in FF results. Primarily filter selects B grade loans,
  • Only 36 months Loan Length,
  • Debt to Income ratio: 14% or less,
  • No Delinquencies in last two years,
  • At least 36 months since last delinquency,
  • No Public Records,
  • Revolving Line Utilization: 52% or less,
  • Inquiries in last 6 months: One or less, and
  • Employment Length: 2 years or higher.
The FF loan filter doesn't exclude loans by Loan Purpose, Home Ownership, FICO Range and Location.

FF Loans Status

The first chart below show the status of loans historically that meet FF lending criteria. The status for the whole population of loans in Lending Club historical loan database is also shown in second chart for comparison.

I need to caution again here that past performance may not be representative of future results. Also, FF loan selection strategy may not offer the sufficient diversification for a Lending Club notes portfolio as only 986 loans met FF criteria out of total 72,015 loans as of September 10, 2012 in historical loan database.

In future blog posts, I will discuss how I developed FF lending criteria and also how performance stacks up with time.

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