Author Topic: LC Email: "The Next Generation Credit Model"  (Read 988 times)

mrwhizzard

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LC Email: "The Next Generation Credit Model"
« on: September 11, 2017, 02:19:15 PM »
I just got the below email about an updated credit model. The one comment here that concerns me slightly is the shift to grades A and B loans. I'm a little wary of a credit model enhancement that makes moves more people up than down...

Quote
We have launched the most advanced and predictive credit model ever used on the LendingClub platform. It's the latest in LendingClub's long history of innovation on behalf of borrowers and investors.
 
The new model leverages machine learning and 10 years of LendingClub data to better assess and price credit risk. LendingClub has helped 1.5+ million borrowers since 2007; each borrower provides unique insight that we can use in our next decision.
 
What investors need to know about the new credit model:
 
•   It's 24% better at differentiating the likelihood of a borrower charging off than the fourth-generation model, and is more predictive than a borrower's FICO score alone.
 
•   It's built on a wealth of proprietary data, incorporates more data points for each borrower, uses best-in-class modeling techniques, and uses dozens of new custom attributes that are predictive in assessing risk.
 
•   We expect loan volume to shift toward higher quality grades (grades A and B) because some borrowers will qualify for lower interest rates under the new model, and other higher-risk borrowers, who may have received an offer previously, will be screened out.
 
•   We continue to see lower delinquency rates across grades and terms in the existing loan portfolio than in the second and third quarters of 2016.
 
We see this credit model as the latest innovation in our continuous enhancement cycle, and one that helps us continue to provide investors with solid risk-adjusted returns. See here for more on what makes the model unique.
 
As always, please reach out to us with any questions or concerns at (888) 596-3159. Monday-Friday from 7 a.m. through 5 p.m. PT, or investing@lendingclub.com.
 
Best regards,
The LendingClub Team

Fred93

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Re: LC Email: "The Next Generation Credit Model"
« Reply #1 on: September 11, 2017, 04:20:59 PM »
...updated credit model.
Quote
We continue to see lower delinquency rates across grades and terms in the existing loan portfolio than in the second and third quarters of 2016.
This statement is misleading and self-serving.

Lets look at the numbers.  The only delinquency data that is available for 17Q2 is the delinquency at the 1-month point.  That's so early in the loan's life that its not worth trying to interpret.  For 17Q1 we have data at months 1,2,3,4.  Lets look at month 4 data.  That's the farthest into the loans we can go for 17Q1.  This is the fraction of loans delinquent at the point where the 4th payment should have been made.

17Q1    1.10%
16Q4    1.25%
16Q3    1.57%
16Q2    1.50%

So at first blush, you might say their statement is correct.  We have a recent vintage with delinquency lower than 16Q2 & 3.  What they don't say is that they're choosing really bad quarters to use for comparison.  Lets continue to look at this series (of delinquency at month 4).

16Q1    1.14%
15Q4    0.88%
15Q3    0.89%
15Q2    0.90%
15Q1    0.79%

Many of you investors know that the loans issued in 2015 performed very poorly for investors.  And yet, by this measure the most recent vintage (ie 17Q1) is even worse than any 2015 quarter.  Hmm.  Things are worse.  What to do...  Must be time to issue a press release saying things are getting better!

14Q4    0.78%
14Q3    0.84%
14Q2    0.79%
14Q1    0.67%
13Q4    0.65%
13Q3    0.84%
13Q2    0.79%
etc


Quote
We expect loan volume to shift toward higher quality grades (grades A and B) because some borrowers will qualify for lower interest rates under the new mode

Grade inflation.


« Last Edit: September 11, 2017, 11:42:39 PM by Fred93 »

JohnnyP

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Re: LC Email: "The Next Generation Credit Model"
« Reply #2 on: September 11, 2017, 07:58:50 PM »
That is pretty weak. All the talk about transparency... Very disappointing to see that kind of misleading comment.

anabio

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Re: LC Email: "The Next Generation Credit Model"
« Reply #3 on: September 11, 2017, 10:14:38 PM »
•   We expect loan volume to shift toward higher quality grades (grades A and B) because some borrowers will qualify for lower interest rates under the new model, and other higher-risk borrowers, who may have received an offer previously, will be screened out.

...Let me translate that for you...

Now that everybody and their brother is into this online lending bandwagon we can't compete anymore. We either lower our interest rates (which will turn off investors) or bump everybody into a higher grade credit risk...whether they deserve it or not...
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

rubicon

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Re: LC Email: "The Next Generation Credit Model"
« Reply #4 on: September 12, 2017, 11:41:18 AM »
it does seem that LC wins while investors lose if there's grade inflation.

mrwhizzard

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Re: LC Email: "The Next Generation Credit Model"
« Reply #5 on: September 12, 2017, 11:52:42 AM »
it does seem that LC wins while investors lose if there's grade inflation.

Well, in the short term anyway. I can't imagine that's a very sustainable practice...

Rob L

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Re: LC Email: "The Next Generation Credit Model"
« Reply #6 on: September 13, 2017, 10:14:34 AM »
I read the email and thought it was an April Fools joke; guess not since it's September.
Maybe this thing was supposed to encourage lenders to hang in there but it probably had the reverse effect.
Not a single positive comment on this thread nor was there anything in the email I found encouraging as a lender.

Lovinglifestyle

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Re: LC Email: "The Next Generation Credit Model"
« Reply #7 on: September 13, 2017, 12:31:23 PM »
I've been looking in vain for something encouragingly positive in the new loan profiles.
I hoped to find more that passed my filter, or, if not that, more in the A,B,C categories that subjectively appear safer.
I don't yet see any (subjective and/or emotional) changes that indicate better quality to me.

bluto

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Re: LC Email: "The Next Generation Credit Model"
« Reply #8 on: September 13, 2017, 04:20:51 PM »
If LC's model improves, that should usually mean less loans for us active filterers to find, either because they improved their model to fix a grading error that we exploit with filters, or because they updated their model to exclude some class of risky loans that weren't being identified previously. 

Lovinglifestyle

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Re: LC Email: "The Next Generation Credit Model"
« Reply #9 on: September 13, 2017, 05:22:02 PM »
If LC's model improves, that should usually mean less loans for us active filterers to find, either because they improved their model to fix a grading error that we exploit with filters, or because they updated their model to exclude some class of risky loans that weren't being identified previously. 

This makes sense to me.  Thanks.
The EFG loans do seem to be more uniformly designated.  Looked at individually, none seem to not belong in those classes as was occasionally the case.
So there's one positive--I can have more confidence that none of the loans in EFG grades are in my filter for a good reason, and I can save time by not checking them.
 

Rob L

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Re: LC Email: "The Next Generation Credit Model"
« Reply #10 on: September 19, 2017, 10:44:13 AM »
The email contained this table.
I'd prefer to see an expected range of the projected returns rather than a single number. How much risk am I taking?
How much better (due to improvements in economy, etc.) or worse (recession, etc.) performance can an investor reasonably expect?
If they can project returns to two decimal places seems they could take a shot at upside and downside risk using historic volatility.
Nah.



[1] “Projected Annualized Net Credit Loss (w/ Prepayment)” also known as Expected Charge-Off Rate, is LendingClub’s projection of the aggregate dollar amount of loan principal charged-off, net of any amounts recovered and accounting for the impact of amounts prepaid, as an annualized percentage of the aggregate dollar amount of loan principal for all loans issued under the Prime Program after September 8, 2017. Projected Annualized Net Credit Loss (w/ Prepayment) is not a promise of future results and may not accurately reflect actual charge-off or prepayment rates. Actual charge-off and prepayment rates experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single loan, borrower or group of loans or borrowers, as well as macroeconomic conditions.

[2] “Average Interest Rate” is the weighted average interest rate of the grade and maturity mix for issued loans for the period of February through May 2017.

[3] “Projected Return” is a measure of the estimated annualized return rate on invested principal (meaning for all funds then invested in Notes or loans) using an internal rate of return (IRR) methodology using a monthly term. Monthly cash flow projections are calculated as follows: the scheduled principal and interest payments based on the Interest Rate, minus the amount of such principal and interest payments lost due to the Expected Charge-Off Rate, minus Expected Fees. Monthly IRR figures are annualized by multiplying the monthly IRR figure by 12. Projected Returns are calculated based on grade and maturity mix for issued loans for the period of February through May 2017. Projected Return is not a promise of future results and may not accurately reflect actual returns. Actual returns experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single Note or loan, borrower or group of Notes, loans or borrowers, as well as macroeconomic conditions. Individual results may vary and projections are subject to change. The information presented is not intended to be investment advice, guidance, or a guarantee of the performance of any Note or loan. Notes are offered by prospectus filed with the SEC and investors should review the risks and uncertainties described in the prospectus prior to investing. Actual results may vary.


Skeptical

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Re: LC Email: "The Next Generation Credit Model"
« Reply #11 on: September 19, 2017, 01:12:10 PM »
@Rob L

Let me take the heretical view that this new model and these new numbers are meaningless. In a couple of years, "The Next-Next Generation Credit Model" will lead us to the Promise Land. No thanks. You can only razzle-dazzle me once. This sheep has been fleeced by your previous model.

Rob L

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Re: LC Email: "The Next Generation Credit Model"
« Reply #12 on: September 19, 2017, 06:08:01 PM »
Hey, just to be sure you know I'm agreeing with you here.
I mean really, projections to two decimal places. So we're counting individual basis points now.
If this is LC's attempt to keep me interested it didn't. Think there's a pretty tough crowd around here right now that feels the same.
My guess is that these projections are 2% to 3% too high; and that's without a recession.

And by the way; a few months ago LC removed its sub-grade probability of default projections from its feeding time file releases.
Less transparency, not more. Wonder why? Embarrassment? Yeah right, these new projections are spot on.

JohnnyP

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Re: LC Email: "The Next Generation Credit Model"
« Reply #13 on: September 19, 2017, 11:28:19 PM »
How can they estimate an 8.19% return on combined E notes with a straight face? Or a 9.59% return for F/G notes? Returns for these notes have been in the toilet for a long time. There are people that are out there buying these notes based on LC expectations. Listen real close and you can hear the flushing sound - money down the shitter. Nobody can convince me that somehow it will improve from shitter to 8-9% in the short run. Not possible. Quit lying to people!


AnilG

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Re: LC Email: "The Next Generation Credit Model"
« Reply #14 on: Today at 12:29:29 AM »
Interesting part I found in your table is discrepancy in Interest Rate between F/G Grade 36 month loans versus F/G Grade 60 month loans. For all other grades, interest rate is higher for 60 month versus 36 month except in the case of F/G grade. Why would borrowers take F/G 36 month loan @ 30.53% when they can take 60 month loan @ 29.89%. Supposedly 60 month loans will come with lower monthly payment commitment with option to pay off in 36 months without penalty?

Similar issue exist with Estimated Credit Loss for E/F/G grade. If E/F/G loans are riskier than A/B/C/D, they should have higher projected loss and higher interest rate to compensate for it.

I don't understand LC logic with the new credit model. There is something really wrong in their analysis and with new credit model as it defies the basic tenet between credit quality, risk and return. I think they are relying too much on ML and not enough on common sense. It will come back to bite them.

The email contained this table.
I'd prefer to see an expected range of the projected returns rather than a single number. How much risk am I taking?
How much better (due to improvements in economy, etc.) or worse (recession, etc.) performance can an investor reasonably expect?
If they can project returns to two decimal places seems they could take a shot at upside and downside risk using historic volatility.
Nah.

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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com