My analysis of the data has shown a marked difference in default rates between
verified and unverified loans in the same class--this is especially true for
the lower classes. Verified loans do better.
LC's prospectus says that they verify 60% of loan applications, and in an NYT
article from a couple of years ago, Lending Club’s co-founder, Renaud Laplanche
explains LC's verification policy, saying: "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."
Unfortunately, Laplanche's explanation does not make much sense to me given
other LC data. First, while the group of preferred borrowers is estimated at 40%
of the loan applications, LC accepts only about 10-15% of its loan applications.
If we make the plausible assumption that LC would want to accept loans from
among their better applicants, then the funded loans should only be taken from
among the unverified group--contrary to what the data shows. Any ideas as to how
to resolve the apparent inconsistency?