Mrs RT: Filtering the Currently Available Loans

Today's post is once again from Mrs. RT. As Mrs. RT became more interested in Lending Club loan selection process, she requested that I focus on automated loan filtering project for her to use instead of further analyzing historical loans.

Engaging in End-to-end Loan Selection Process

As Mr. RT is excited about gaining a fraction of interest every day through Lending Club, I’m becoming curious to know about the end-to-end loan selection process. Even though we select loans together at our Lending Club night, the prospective loans are pre-filtered by Mr. RT when I get involved in the final decision. It is like I’m taken to the restaurant Mr. RT has chosen and only activity I can do is selecting the food there. I want to see what kind of restaurants are out there and select what I really want to eat, too!

Exploring Lending Club Site

So, with Mr. RT’s account and password information, I explored the Lending Club to find loans for the first time, hoping I can find something that could lead more excitement to both of us. Once I logged in the site, first I found the double-digit net annualized return on the account summary page. Not bad considering the interest rate of 10 year treasury is less than 1.6% now and one year return of DJIA is less than 9%. I was skeptical about peer-to-peer lending when we started first, but I am convinced by the result. Keep up the good job, Mr. RT!

Next I started to browse notes. I found there were over 2,300 loans currently available for purchasing notes. I’m surely glad that Mr. RT pre-selects before Lending Club night. Otherwise, I’d be overwhelmed… But, wait, many filters are already available to select notes. I should be able to do it!

Trying Filters on LC Site

In one of my previous posts, I wrote a high interest rate loan would indicate borrower’s financial irresponsibility and I would avoid such loans as responsible lender. So, I selected interest rate A, B and C.

Now I think about double-digit return Mr. RT has achieved so far. It’s impossible to reach that rate if he selects A grade loans with interest rate of only 7.41%. From investment perspective, I excluded A grade borrowers. Now just over 1,300 notes have been selected.

Next let me exclude borrowers with public records and delinquencies last 2 years as they are considered to carry high risk of default. Even though I didn’t assume many borrowers would fall into these filters as they were categorized under higher level of credit score, to my surprise, more than 200 notes were excluded with these filters.Moreover, I totally want to remove borrowers with delinquencies. So, I chose 60 months or more since last delinquencies. There are still over 800 notes.

I want to make sure I’ll get my investment back! So, I selected borrower’s both debt-to-income ratio as low (max 20%) and revolving balance utilization as low (max 50%). Selected notes got down to almost 190.

Let me think… I’m sure Mr. RT has given valuable recommendations in his posts. Let’s see what he said.

He recommended 36 months over 60 months loans because of higher default rate of 60 months loans. So, I excluded 60 months term from the filter. Here’s another Mr. RT’s tip. He recommended avoid loans of extreme amounts. I set the max loan amount as $25,000 and still 130+ notes were selected.

Hmm, what other filters should I use…? Other filters do not seem reasonable to filter out loans. Employment length maybe, but the economy has not been good to people with even good credit score.

Discovering CSV Download

At that point I noticed a small icon at the bottom of the table, Download All. I clicked that and found all available notes, over 2.300, were imported as csv file. If I want to filter notes further, I have to filter the csv using the same criteria above again. It would have been better if only filtered notes through Browse Notes screen were downloaded at that point.

So, I started over my filtering using csv file. Most field names in the csv file are recognizable, but some are not. What are “percent_bc_gt_75” or “pub_rec_gt_100”?. It would be nice if Lending Club could provide the glossary of the description of each field for geeky lenders. Good thing about csv file is that now I have more flexibility to filter loans. I can filter out extreme low amount as well as per Mr. RT’s advice (less than $2,000), borrowers with any delinquencies in the past, etc.

As I’m interested to know about borrower’s financially responsible behavior, I filter out borrowers who opened more than five accounts in the past 24 months and had more than 2 mortgage accounts. At that point, I selected 70+ notes. There’s a field called “exp_default_rate”. Is it reliable data? I'm not sure, but I hate to lose money. So, I selected the lowest rate (2.3%).

Finally ...

Tah-dah! Finally 11 notes have been selected. It’s a good selection of notes I can recommend to Mr. RT and discuss. Mr. RT, let’s do Lending Club night!

Guest Post: Attraction to Lending Club

Today's post is once again from Mrs. RT. She is making sure that I continue to maintain the consistency of posting twice a week at least. Due to work spilling after-hours and other commitments, I didn't have a chance to make much progress on my analysis this week.

Attraction to Lending Club
by Mrs. RT

Mr. RT and I have been doing Lending Club night for a few months now. He’s very excited and proudly reports me the earnings time to time… actually almost every night! The gains are very small, so far.

Compared to the earnings that we've been receiving through our traditional investment vehicles, the gains from Lending Club are not comparable; a few digits are off. Still, we rarely check those investment accounts. Even if we did and found out we had gained much more than expected in one quarter, the excitement is not comparable to a fraction of gains through Lending Club about which Mr. RT is excited. I also started to get excited about that small amount of gain as well. Joy is contagious, you know? But, I wonder why?

Boring Investments

As for the traditional investment, we have mutual funds and ETFs and most of them are index based. We used to pick and choose actively managed funds, but we got rid of most of them and now stick to the index. We still do re-allocation time to time.

We also buy individual stocks hoping we may be able to beat the index. But we don’t buy and sell; we buy and hold the stocks with a long-term vision. We rejoice when the stock goes down, so that we can buy more. Our portfolio typically gains and loses more or less according to the market.

We check this portfolio time to time and find returns are 10% gain, 3% loss, etc. But not so much emotion is attached to it. Because these results are beyond our control. Tons of elements impact the market and it goes up and down. Not only the government’s reports and policies, the conditions of housing market and job market, but also every single major incident in the world is considered to be critical ingredients to the direction of the market. Even smartest economists cannot figure out why the market moves this way that way. There’s no crystal ball, as they say.

Unpredictability of Market and Life

What can you control in the traditional market? The market is too big, so, let’s narrow down to an individual company. We think we have analyzed one company in and out, we know some litigation issue is going on, its products are selling, etc. Yet, it’s very difficult to take that much effort to analyze one company and make decision as part-time investor like us. Moreover, we should not put eggs in only one basket. Investment is so uncontrollable and it’s not our wisdom that decides the return most of the time, but God of the market seems to decide the return. It doesn't do us any good to become sad or happy when focusing on something we cannot control.

Come to think of it, life is full of unpredictability and surprises, both small and large scale… I thought you would cook tonight, but you didn't and now I’m hungry! I thought you would be back home by now, where are you? There was restructure of my company and laid off our team, what should I do now? etc., etc., etc. Then, if there’s no change, we complain life is boring. Human beings are complicated things.

Sense of Control

Anyhow, why is Mr. RT so excited about small return through Lending Club? Because he can control. He picks up loans (with help from me, of course) and can get the return as it’s promised. It’s like science experiment we used to do it as a kid. Wow! I can make a fire through a magnifier! Remember those days? Mr. RT is just behaving like a kid as he does all the time.

This excitement may wear off as he gets used to this or he starts to see default loans later as loans age. But for now, as I see him, he’s a happy camper and so am I.

Lending Club Loan Amount: Default of Loans with 8% and higher Interest Rates

This post is continuation of my analysis of loan amount for different interest rate bucket from previous post Lending Club Loan Amount: Defaults for Loans with <8% Interest Rate.

8 - 9.99% Interest Rate

The chart below shows the loan status for different loan amount bins at 8% interest rate bucket (contains loans with interest rate of 8% and higher but below 10%). The left axis and stars show the actual number of loans. The right axis and bars show the percentage of loans. The 36 month loans are separated from 60 month loans. The loans listed before 2009 are excluded from this analysis.

I keep on being amazed that, at lower interest rate, there is no trend between loan amount and default rate. I had expected to see trend of rising defaults with rising loan amount for the same interest rate bucket. The 36 month loans listed in 2009 do show the rising default on percentage basis with loan amount; however the number of loans in this interest rate bucket is so few for results to be meaningful.

As with the 6% interest rate bucket discussed in the last post, what stands out right away in this chart is that there are no 60 month loans with charged off, default, late and in grace period status that were listed in 2011 and after. The default rate for 60 month loans listed in 2010 is comparable or worse than 36 month loans issued during the same time period. This may indicate that 60 month loans take 18 months or more before defaults and late payments start to occur.

10 - 11.99% Interest Rate

The chart below is similar to the one above for loans with interest rate of 10% and higher and below 12%.

Finally, the expectation of rising default with loan amount for the same interest rate bucket have started to materialize. Except for very small loan amount, the default of loans in 10% interest rate bucket appears to be rising with rising loan amount. So, it appears that default of loans with less than 10% interest rate may be driven by factors other than borrower's inability of making regular monthly payments.

Another notable change in pattern found in this interest rate bucket is the appearance of 60 months loans listed in 2011 with loan status of charged off, default, late, and in grace period. The default rate of 60 month loans is comparable or worse than that of 36 month loans listed during the same time frame. It appears that  the 10% interest rate is the magic threshold beyond which the monthly payments start to impact the borrower's ability of making regular monthly payments.

12 - 25.99% Interest Rate

As the patterns for different interest rate buckets for 12% interest rate and higher are very similar, I decided to combine all the buckets for interest rate 12% and higher. The chart below shows the loan status of different loan amount for interest rate buckets with 12% interest rate and higher.

If any reader is interested in a particular interest rate bucket, please comment below and I will post the chart in my future blog posts. The table below also shows (click on the image to zoom) the number loans with different status for different loan amount buckets and interest rate buckets, separately for 36 months and 60 months loans.

Takeaways

• Similar to previously discussed 4% and 6% interest rate buckets, there is no trend of rising default of loans with loan amount for loans of 8% interest rate bucket. Only beyond 10% interest rate, the larger the loan amount, higher the default of loans.
• Purchasing new 60 month loans in 8% interest rate bucket and selling them off at par or at premium within 18 months on secondary market may be a potential interest harvesting strategy. Of course, impact of transactions fees need to be considered to assess viability of such strategy.

Do you want a new P2P lending data platform? Support P2PLoanStats crowdfunding campaign.