Author Topic: Are LC Grades Completely Random?  (Read 2452 times)

neals384

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Are LC Grades Completely Random?
« on: August 22, 2016, 08:38:43 PM »
Hi.  Have been on prosper for 5 years, and now that LC is allowed in Oregon, I'm getting my feet wet.

I'm really struggling to understand LC's underwriting.  Here's an example using two listings from last month:

                Listing 1       Listing 2
Amount   $35K       $24K
Period   60               36
         
HO?           Rent               Mortgage
Yrs emp.    7                   2
Salary   $9K              $9K
State   TX                   MD
DTI          24.86%        22.99%
      
FICO     725                  685
Open Lns      9                   8
Rev Bal   $25K        $2.6K
Inquiries      1                   1
Dqs (2 yr)      0                   3

There are more data points of course, but those are the highlights.  Which listing do you like better?  Would you expect a dramatic difference in grades/interest rates between the two?

By now, you may have guessed that listing 1 is a G1 at 28.18% interest, while listing 2 is an A3 at 7.59%.  Does this make any sense at all?  Or does LC simply use a magic 8 ball to assign grades?

Links:
https://www.lendingclub.com/browse/loanDetail.action?loan_id=84730228   
https://www.lendingclub.com/browse/loanDetail.action?loan_id=84626679


bluto

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Re: Are LC Grades Completely Random?
« Reply #1 on: August 25, 2016, 02:52:16 PM »
It's entirely possible I don't recall correctly, but once upon a time LC had an interest rate calculator/grade predictor on the public portion of their site, and the two things that most surprised me were going from 36 months to 60 months added at least a full letter grade (ie from B1 to C1 or C2 or C3) and an increase in the amount (especially increases above $30,000) had a similarly large effect on the grade.  It surprised me and after learning of those two escalators, I started investing in much lower grade notes. 

Given that the after default returns on the notes only increase slightly, LC's grades don't appear to be too far off. 

AnilG

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Re: Are LC Grades Completely Random?
« Reply #2 on: August 25, 2016, 03:14:36 PM »
I discussed this issue very long time ago. See my post from June 2012 on my old blog.

Lending Club Loan Length: Best 60 month spread with B4 Grade Loan
http://andirog.blogspot.com/2012/06/lending-club-loan-length-best-60-month.html

It's entirely possible I don't recall correctly, but once upon a time LC had an interest rate calculator/grade predictor on the public portion of their site, and the two things that most surprised me were going from 36 months to 60 months added at least a full letter grade (ie from B1 to C1 or C2 or C3) and an increase in the amount (especially increases above $30,000) had a similarly large effect on the grade.  It surprised me and after learning of those two escalators, I started investing in much lower grade notes. 

Given that the after default returns on the notes only increase slightly, LC's grades don't appear to be too far off.
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Anil Gupta
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Fred

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Re: Are LC Grades Completely Random?
« Reply #3 on: August 25, 2016, 03:27:13 PM »
It is not "completely" random, although I did see some interesting grade assignments before.

LC has an initial scoring model which provides the application with a score, which when combined with the applicant’s FICO score and certain other credit attributes arrives at a Model Rank. The Model Rank is based upon an internally developed algorithm which analyzes the performance of borrower members and takes into account FICO score, credit attributes, and other application data. The Model Rank is between 1 and 25 and corresponds to a Base Risk Sub-Grade.

https://www.lendingclub.com/foliofn/rateDetail.action

Rob L

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Re: Are LC Grades Completely Random?
« Reply #4 on: August 25, 2016, 05:45:08 PM »
I'm really struggling to understand LC's underwriting.  Here's an example using two listings from last month:
Links:
https://www.lendingclub.com/browse/loanDetail.action?loan_id=84730228   
https://www.lendingclub.com/browse/loanDetail.action?loan_id=84626679

The browsenotes files containing these loans when released to the platform have additional additional data that may be relevant:

                                                                                G1                                                    A3
                                                                        loan_id=84730228                         loan_id=84626679
accounts_open_in_past_24_mths                            7                                                        3
months_since_recent_bank_card                            2                                                       50
total_balance_excluding_mortgage                    $214,927                                           $69,441
total_il_high_credit_limit                                      $203,013                                           $75,880
total_high_credit_limit                                          $232,813                                          $333,199

Presumably, because of the high existing debt load, LC source verified income for the G1 loan. They did not verify income for the A3.

I'll give LC more credit than the magic 8 ball on this one. Should be interesting to "stay tuned" on these.
I think the A3 is under priced, but hey, I'm a lender so I have some bias here.