Lending Club’s loss-rate numbers
As I thought he would, Lending Club CEO Renaud Laplanche replied to yesterday’s post with exactly the numbers I asked for. The loss rate for loans where Lending Club has verified the borrower’s income is 2.8%; the loss rate for loans where Lending Club hasn’t verified the borrower’s income is lower, at 2.7%. So Ron Lieber’s worries do indeed seem to be misplaced.*
Laplanche explains why Lending Club doesn’t verify income on all its loans:
The main reason why we do not perform income verification on 100% of the loans is to avoid adverse selection: the borrowers who have perfect credit history and do not exhibit any particular risk factors (who fall into the 40% we do not verify) are also those who have the least tolerance for a cumbersome income verification process, and are most likely to abandon that process and seek funding elsewhere. They are, however, the exact kind of borrowers we want to retain.
The point here is that Lending Club needs to be just as attractive to borrowers as it is to lenders. Just like any financial institution, Lending Club will treat its best borrowers — the most creditworthy ones — very well indeed. After all, those borrowers are reliably profitable customers — they should be treated well.
Laplanche also points out that you can’t assume that people who fail the income-verification process were lying about their income in the first place. There’s a lot of credit to go around, these days, and as he says, “these individuals represent the top 10% of applicants in the first place, and that they have other options which include credit cards that do not require any income verification at all”. Often it’s easier for them to just find their money elsewhere, and they drop out of the Lending Club system — it’s not necessary to assume any mendacity on their part.
*In case you were wondering what exactly these figures represent: take all the income-verified loans which are at least one year old. Add up the principal amount for all of them, call it P. Then look at the subset of those loans which ended up being charged off. Take the charged-off amount, and call it C. And then also note the amount of interest that those charged-off loans managed to generate before they were charged off. Call it I. Then then loss rate is (C-I)/P. Not that the details of the calculation really matter: the main thing is that we’re performing an apples-to-apples comparison between the two sets. And the loans without verified income are performing better, in terms of delinquency, than the ones with verified income.