[Amorymeltzer]

The employment length is really bugging me. I've always selected people with a few years at their current job, leaning towards higher, because it feels safe, but this says that <2 years of experience is better than longer! I wonder if they're "newer" so more likely to stay around and not be pushed out, or if the rates are much higher compared to a marginal increase in risk. I'm leaning toward the latter. It looks like income has the same effect for home loans; <50k has a much higher return simply because they get a huge rating hit.

My other big hit is 3 versus 5-year terms. Anyone here care to comment? I like the 36 months because it feels more liquid and when I started I wasn't sure LendingClub was going to be around for a decade or more. Beginning to think I should reconsider that stance.

[ThrustVectoring]

For students going to a particular university, math SAT scores are inversely correlated with verbal. If students had a higher math SAT and a higher verbal SAT, they'd be at a better school (and worse math + worse verbal = worse school).

For debtors inside a certain grade, it looks like employment history and other creditworthiness metrics are inversely correlated. So I suspect that it's less employment length being an anti-signal, but rather within the grade people with short employment length have compensatory advantages to stay in that grade.

[ClementM]

Also, it's pretty instructive to look at the Lending Club grading algorithm in details.

They made it public at some point. Now they are a little less transparent about it.

But some details can be found in their SEC prospectus.

I can link that up as well if you guys want.

[jlittel]

I'd love to see any info.

Their current offering document is here[1], but I don't see much mention of specifics. There's some detail on mapping to grades on p42 of the Aug 22 doc, as well as interest rates charged for each risk category.

[1]https://www.lendingclub.com/info/prospectus.action

[ClementM]

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

[akg_67]

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.

[hueyp]

> if the rates are much higher compared to a marginal increase in risk

Exactly. Same thing with public records -- having a public record could very well mean you have a higher default rate but what is important is LC punishes it more than they should so its a value investment.

We invest via a model (not filters) and the whole idea behind the model isn't to find what criteria makes someone less likely to default in absolute terms, but what makes one D2 loan less likely to default than another D2 loan.

[louischatriot]

I'm no expert here but current job duration may be counter-intuitive. We usually think that the longer the better but it may also correlate with inability to find another job, so in fact during a recession, these kinds of people may actually be more at risk than people used to job-hop.

It probably needs to be controlled for social class and job type but I think this could explain the phenomenon.

[radmuzom]

> but this says that <2 years of experience is better than longer

When you say better, do you mean risk or return? First of all, you are looking at the variable in a "univariate" sense,i.e, the relationship of the default rate or return by the categories of this variable. But their internal model is multivariate - there may be other factors influencing risk or return which is not obvious in the univariate dimension. It also depends on the power of this variable in predicting risk. And finally, lower risk may mean lower return - you just need to find the efficient frontier :) - http://www.investopedia.com/terms/e/efficientfrontier.asp.

[ClementM]

Yes, exactly for all the criteria it is a matter of "the rates compared to marginal increase in risk".

Look at the 'A' grade. They're nice and safe intuitively, but in my opinion they're not a really good investment.