Author Topic: Default rates by employment title  (Read 4296 times)

PhilGD

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Default rates by employment title
« on: December 16, 2016, 01:20:15 AM »
This forum has been a huge resource for me beginning in March 2015 and in the spirit of the holidays, I've decided to share a recent batch of work I've done on Lending Club's historical data. For the past week I've been working to crack open the employment title data and see if it reliably predicts charge off rates. My complete findings are contained in the attached PDF file.

The biggest challenge in this project was dealing with spelling errors and other issues that arise from a free-text field, which make it hard to group the data. For instance, using Excel, it is not easy to simply group all "Presidents" in one category. I had to deal with the people who misspelled a word, included extraneous spaces and special characters, or used compound descriptors like "President & CEO."

Methodology:

1. All loans issued between September 2007 (the earliest issue date) and June 2015 were included in my analysis - more than 643,000 loans. A "charge off" was defined as a loan status of "charged off" or "default," where the date of last payment occurred 0 - 12 months after the loan was issued. If the loan was charged off in month 18, for example, it was not counted as charged off for the purpose of this project. By aligning the data in this way, I was able to remove the effect of loan age for loans issued recently. Why not include all loans through November of 2015 (i.e., all loans with up to twelve months of payment data)? Because I wanted a buffer to account for delinquent loans that might roll into charge-off status. Why choose 12 months of payment data as the cut-off? A: I wanted the largest sample possible; B: fewer than 12 months wouldn't allow for enough seasoning; C: more than 12 months would whittle down the database too significantly; D: a person's employment status is more likely to change as a loan gets older.

2. After I had gathered the data and defined what a "charge off" is, I used a pivot table to determine the most commonly used employment titles. If you're curious, the top three most common were "teacher," "manager," and "owner." I decided to create a short list of employment title categories by taking the top 100 most common titles. The list eventually grew to 124 total categories, since some common categories were not detected by the initial pivot table analysis.

3. The pivot table report showed a clear separation between the low-hanging fruit in the database and everything else. The low-hanging fruit were the people who used a simple description for their employment title and spelled it correctly, such as "teacher." The difficult people used the name of their employer instead of an employment title, or used a compound description such as "President & CEO," or misspelled a word, or included special characters such as "&" or "/".

4. I quickly encountered a problem: some people could be included in multiple employment categories. Based on my shortlist, "Assistant director systems engineering" was an assistant, a director, an engineer, and a systems engineer all at once. I resolved to allow for multiple employment categories/labels per loan in order to overcome this problem:

Breakdown of loans by number of labels
One label335,495
Two labels71,845
Three labels3,556
Four labels98
not labeled271,000
emp title blank  36,886
-------------------------------
total 643,698

5. I used keyword searches to label as many loans as possible. For example, "fire fighter," "fire marshall" and "fire chief" were all lumped together. Similarly, "CEO," "COO," "CTO," "CFO", and their non-abbreviated versions were all lumped together into the "C-suite" category.

6. As noted in the table above, over a quarter million loans in my sample remain unlabeled. This represents the really difficult ones - most of them are not employment titles, but employer names, and hence impossible to categorize. Others are indeed employment titles, but they contain severe misspellings or belong in categories that are too uncommon to be statistically significant. There are also probably many loans that could be labeled, but belong to a category that I missed.

7. I calculated charge-off rates for each category and sorted from lowest-to-highest. Median income was also calculated for each employment label. Complete results for all categories are included in the attached PDF file. Below is a small sampling of the categories for the purpose of including a pretty chart:



8. I validated the results by splitting the sample into "earlier loans" and "later loans" and recalculating the charge off rates. If the results were reasonably similar for the separate samples, then we can conclude that employment title is predictive of charge off rates. The cutoff date that I chose was October 2014 - loans issued on or before this date are in the "early" sample and loans after this date are in the "later" sample. I chose this cutoff point solely in the interest of creating equally-sized samples - I wanted an even split. Below is the chart that proves my methodology is mostly accurate:



Please feel free to dig into the complete data set (attached) and offer feedback. I'm particularly interested in suggestions for how to automate the labeling process - parsing through text data for keywords and misspellings is not easy to do in Excel. But if it can be accomplished, then I'm confident it would be useful for including this data in a regression model.

jennrod12

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Re: Default rates by employment title
« Reply #1 on: December 16, 2016, 01:32:49 AM »
Very neat stuff, thank you!

I read an analysis somewhere that people who misspelled things on their application had higher charge-off rates, I typically shy away from people who spell their job title wrong.

It would also be interesting to know the average interest rate grade (A-G) for each job title, or at least the average interest rate grade for the loans that charged off (or both).

Jenn

Rob L

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Re: Default rates by employment title
« Reply #2 on: December 16, 2016, 08:54:19 AM »
Very nice! Thanks.

rawraw

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Re: Default rates by employment title
« Reply #3 on: December 16, 2016, 12:50:05 PM »
Do you think you should control for loan risk?  High charge offs may occur by profession but that doesn't necessarily tell us if LC is accounting for it in the rate charged.

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PhilGD

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Re: Default rates by employment title
« Reply #4 on: December 16, 2016, 02:01:54 PM »
I dug a little deeper into the data to investigate the correlation between interest rates and bad loan rates by profession. Below is a chart detailing this comparison for the same sub-sample of professions that I included in the OP. I also made a new PDF file with this data for all 124 professions included in my initial study (attached).



It looks like LC is doing a good job of assigning interest rates, even though I suspect their underwriting doesn't really account for employment title, since the free-text format makes it hard to accurately automate the label assignments. That said, the imperfect relationship between interest rate and profession suggests there may be some arbitrage opportunities to be found in the data.

-----------------------------------------------------------------------------------------

Here's another chart showing the comparison for all 124 professions. I didn't label the professions this time because it would be too messy to do so.



Outlier A
The highest average interest rate in the data was 14.7%, and it corresponds to the "Military" profession. "Military" is a category consisting of loans where the employment title contained any of the following keywords:

-Army
-Military
-Marine
-Soldier
-Lieutenant
-Colonel
-Corporal
-Sargeant
-National Guard
-Navy
-Air Force
-Department of Defense

Outlier B
The other big outlier has an interest rate of 14.2% and corresponds to all employment titles containing the keyword "Government."

Intuitively there is a connection between Government employees and folks in the Military - they all work for the United States government. But it seems like they are both being treated unfairly since their 12-month default rates (3.77% for Government and 4.71% for Military) are both below the population average (5.34%). I'm not sure why this discrepancy exists in the data. Perhaps there is a greater concentration of 5-year loans in these categories compared to most. I could take a deeper dive into the data for these outliers if people are interested.

One final point. The profession with the highest default rates in the population is listed as "dealer." This corresponds mostly to card dealers for table games. I have a hunch that most of these people are actually gamblers rather than casino workers - and they probably tend to gamble away their LC loans.

fliphusker

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Re: Default rates by employment title
« Reply #5 on: December 16, 2016, 03:56:45 PM »

One final point. The profession with the highest default rates in the population is listed as "dealer." This corresponds mostly to card dealers for table games. I have a hunch that most of these people are actually gamblers rather than casino workers - and they probably tend to gamble away their LC loans.

Silly me, was thinking dealer was car dealer.  LOL.  While Nevada does not have all the casinos, I still do stay away from Nevada being one of the "sand states".  Not sure if it is silly to do, just something I read in a number of articles when I first started.

I find this fascinating reading, thanks for the great amount of effort put forth with this. 

anabio

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Re: Default rates by employment title
« Reply #6 on: December 16, 2016, 05:38:37 PM »
The highest average interest rate in the data was 14.7%, and it corresponds to the "Military" profession. "Military" is a category consisting of loans where the employment title contained any of the following keywords:

An interesting tidbit concerning military and interest rates that not too many people know about.

There is something called the SCRA (Servicemembers Civil Relief Act). This IS an ACTUAL law. Look it up. A lot of military do not know about  it either...which is nice as far as lenders are concerned...after all it probably would be illegal to put a clause in a contract stating the borrower could not join the military during the term of the loan...

SCRA applies to ANY loan, personal, mortgage, auto, etc.

SCRA states that any loans a person takes out before going into the military can be reduced down to a maximum interest rate of 6% if the correct paperwork is submitted. So if someone took out an LC loan at 14% just before going into the military they could submit paperwork and that loan servicer would be required to reduce that loan to a maximum of 6%. That 6% rate would stay in  effect until the person got out of the military. This is NOT a deferment. That excess interest is "forgiven" forever.

NOTE: the law does NOT say that a loan taken out AFTER entering the military can be crammed down to 6%. It doesn't go that far.

There are other benefits also. If my memory serves me they can also return a leased automobile or cancel cell phone contracts without any penalties. Although that particular "perk" might only be in case the servicemember was stationed overseas.

in answer to an obvious question...NO. I never pulled any stunts like that when I went in...didn't even know about it when I went in...and probably was too timid/honest to play that game even if I knew about it.
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jheizer

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Re: Default rates by employment title
« Reply #7 on: December 16, 2016, 06:00:46 PM »
Interesting findings. I'll have to read it more when I have more time.  A long time ago I filtered out anyone that had a title of President, Ceo, own, etc. Looks like that might have been a mistake.
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nonattender

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Re: Default rates by employment title
« Reply #8 on: December 16, 2016, 07:53:38 PM »
Intuitively there is a connection between Government employees and folks in the Military - they all work for the United States government. But it seems like they are both being treated unfairly since their 12-month default rates (3.77% for Government and 4.71% for Military) are both below the population average (5.34%). I'm not sure why this discrepancy exists in the data. Perhaps there is a greater concentration of 5-year loans in these categories compared to most. I could take a deeper dive into the data for these outliers if people are interested.

Military borrowers are of great interest to me and always have been.  I did similar studies during Prosper 1.0 and found that, above a certain rank (E4) they were really good credit risks.  As someone mentioned above, handling SCRA is tricky for the originator/servicer, though there are a lot of drivers (having one's CO contacted about a loan will often clear any delinq; good credit req'd for clearances) working to make sure military borrowers perform - as well as a certain sense of duty/responsibility that I think plays into that, as well.

I'll take anything with which you can come up on that topic;  thank you!
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Debt Free

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Re: Default rates by employment title
« Reply #9 on: December 17, 2016, 01:05:14 AM »
in answer to an obvious question...NO. I never pulled any stunts like that when I went in...didn't even know about it when I went in...and probably was too timid/honest to play that game even if I knew about it.

I know what you're saying.  Different scenario, but same feelings.  Back in 2003, out of the blue, I was diagnosed with End Stage Renal Failure and nearly died.  Recovered about 26% kidney function after a week in the hospital.  Eight years later at age 42, came the point of going on dialysis for a year.  Without getting into details, this automatically qualified me for Medicare and Social Security Disability.  Medicare I HAD to go for as it subsidized the majority of my dialysis treatments.  I never claimed the Social Security Disability during that year.  Could have.  Should have (considering this was at the peak of the financial crisis, my wife had just been laid off, and we had just had our first child).  But my pride in work wouldn't let me be more of a "burden" on society.  Besides heck, I COULD still work.  I was just happy I didn't die two weeks before my second anniversary.

SLCPaladin

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Re: Default rates by employment title
« Reply #10 on: December 18, 2016, 10:08:31 PM »
in answer to an obvious question...NO. I never pulled any stunts like that when I went in...didn't even know about it when I went in...and probably was too timid/honest to play that game even if I knew about it.

I know what you're saying.  Different scenario, but same feelings.  Back in 2003, out of the blue, I was diagnosed with End Stage Renal Failure and nearly died.  Recovered about 26% kidney function after a week in the hospital.  Eight years later at age 42, came the point of going on dialysis for a year.  Without getting into details, this automatically qualified me for Medicare and Social Security Disability.  Medicare I HAD to go for as it subsidized the majority of my dialysis treatments.  I never claimed the Social Security Disability during that year.  Could have.  Should have (considering this was at the peak of the financial crisis, my wife had just been laid off, and we had just had our first child).  But my pride in work wouldn't let me be more of a "burden" on society.  Besides heck, I COULD still work.  I was just happy I didn't die two weeks before my second anniversary.

Just want to say thank you for your strong sense of ethics and personal responsibility. You certainly shouldn't have felt bad about taking disability, it is there precisely for your situation. But the fact that you did what you did speaks volumes to your character. You sir are a very good person. My hats off to you!

dbailey75

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Re: Default rates by employment title
« Reply #11 on: December 20, 2016, 09:05:41 PM »
The highest average interest rate in the data was 14.7%, and it corresponds to the "Military" profession. "Military" is a category consisting of loans where the employment title contained any of the following keywords:

An interesting tidbit concerning military and interest rates that not too many people know about.

There is something called the SCRA (Servicemembers Civil Relief Act). This IS an ACTUAL law. Look it up. A lot of military do not know about  it either...which is nice as far as lenders are concerned...after all it probably would be illegal to put a clause in a contract stating the borrower could not join the military during the term of the loan...

SCRA applies to ANY loan, personal, mortgage, auto, etc.

SCRA states that any loans a person takes out before going into the military can be reduced down to a maximum interest rate of 6% if the correct paperwork is submitted. So if someone took out an LC loan at 14% just before going into the military they could submit paperwork and that loan servicer would be required to reduce that loan to a maximum of 6%. That 6% rate would stay in  effect until the person got out of the military. This is NOT a deferment. That excess interest is "forgiven" forever.

NOTE: the law does NOT say that a loan taken out AFTER entering the military can be crammed down to 6%. It doesn't go that far.

There are other benefits also. If my memory serves me they can also return a leased automobile or cancel cell phone contracts without any penalties. Although that particular "perk" might only be in case the servicemember was stationed overseas.

in answer to an obvious question...NO. I never pulled any stunts like that when I went in...didn't even know about it when I went in...and probably was too timid/honest to play that game even if I knew about it.

Interesting that you bring this up, Loan ID: 71905523, job title is solider.  paid on time for 6 months, hasn't made a payment since.  Fico on the original listing was 745-749, increased to 795, 2 months after they stopped making payments, and then droped to 635 the next two months.  not once has lending club made contact with the borrower.  I was thinking if this person was deployed maybe they receive some sort of forgiveness, and that's why they stopped paying,  but per you comment they would still need to make their payments, at a lower interest rate. 

So great, I have another one that will go into default.

lascott

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Re: Default rates by employment title
« Reply #12 on: December 20, 2016, 09:10:59 PM »
Interesting that you bring this up, Loan ID: 71905523, job title is solider.  paid on time for 6 months, hasn't made a payment since.  Fico on the original listing was 745-749, increased to 795, 2 months after they stopped making payments, and then droped to 635 the next two months.  not once has lending club made contact with the borrower.  I was thinking if this person was deployed maybe they receive some sort of forgiveness, and that's why they stopped paying,  but per you comment they would still need to make their payments, at a lower interest rate. 
FYI, LC has a help page on SCRA https://help.lendingclub.com/hc/en-us/articles/213803418-SCRA-and-MLA-benefits-for-servicemembers-
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anabio

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Re: Default rates by employment title
« Reply #13 on: December 20, 2016, 10:15:22 PM »

An interesting tidbit concerning military and interest rates that not too many people know about.
......

SCRA states that any loans a person takes out before going into the military can be reduced down to a maximum interest rate of 6% if the correct paperwork is submitted. So if someone took out an LC loan at 14% just before going into the military they could submit paperwork and that loan servicer would be required to reduce that loan to a maximum of 6%. That 6% rate would stay in  effect until the person got out of the military. This is NOT a deferment. That excess interest is "forgiven" forever.

NOTE: the law does NOT say that a loan taken out AFTER entering the military can be crammed down to 6%. It doesn't go that far.


Interesting that you bring this up, Loan ID: 71905523, job title is solider.  paid on time for 6 months, hasn't made a payment since.  Fico on the original listing was 745-749, increased to 795, 2 months after they stopped making payments, and then droped to 635 the next two months.  not once has lending club made contact with the borrower.  I was thinking if this person was deployed maybe they receive some sort of forgiveness, and that's why they stopped paying,  but per you comment they would still need to make their payments, at a lower interest rate. 

So great, I have another one that will go into default.

As someone else has already mentioned above (and I concur), debt default is frowned upon in the military--I don't know...but it probably has something to do with people who handle nukes and loaded weapons should NOT be unreliable like that. The base commander can become involved if the situation warrants it. I assume no one out there would like the president of the company they work for to get involved in their money problems...well...the base commander is just like a president of a company but with a LOT MORE power.

 I don't know if LC would go as far as contacting the base commander but they could.
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

anabio

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Re: Default rates by employment title
« Reply #14 on: December 20, 2016, 10:35:42 PM »
Interesting that you bring this up, Loan ID: 71905523, job title is solider.  paid on time for 6 months, hasn't made a payment since. 
.....
  I was thinking if this person was deployed maybe they receive some sort of forgiveness, and that's why they stopped paying,  but per you comment they would still need to make their payments, at a lower interest rate. 

So great, I have another one that will go into default.
In actuality there are situations where forgiveness is required (and rightly so). For instance a lease on an apartment, auto lease, cell phone lease when the service member is deployed.

That should not be much of a problem. The landlord should easily be able to re-rent the property. The cell phone company shouldn't be upset because the person is no longer using their services. The car lease company might be a little tricky because the car has lost a lot of value...but...hey...the car lease manager doesn't exactly have to worry about being shot every time he leaves his office.
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money