Let’s hop right into more of my filters. As in the last post, items in bold and red are filters that the Lending Club website itself cannot perform, but can be performed with downloaded loan data from the website.
5. Remove loans if they failed income verification
This is a more nuanced filter. There are four possible results for income verification. The first is “verified”, wherein Lending Club asks the borrower to verify his income and he succeeds. The second possible result is “requested”. Here the borrower has been asked to verify his income but has not currently done so. The third is “failed”, pretty self-explanatory. The final result is the kicker, though. It is “not required”.
And as explained here, 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%.” Why is this so? It’s because for the most creditworthy borrowers, Lending Club doesn’t want to bother them to complete the somewhat cumbersome task of income verification. These borrowers are creditworthy enough to seek loans elsewhere if they have to jump through a bunch of hoops.
So on the Lending Club website, you can filter out loans that haven’t passed income verification, but you’d be doing yourself a disservice because the very best borrowers aren’t asked to complete income verification. So instead of filtering out “requested”, “failed”, and “not required”, and only keeping loans that have income “verified” (as is done on the Lending Club website filter), I only filter out loans that have “failed” income verification.
6. Remove loans if borrower has debt-to-income (DTI) greater than 20%
DTI is a pretty simple concept. If I make $100,000 per year and I have outstanding loans for $25,000, then my DTI is $25,000 divided by $100,000 or 25%. The higher the borrower’s DTI, the more likely they are to default. This is because higher DTI borrowers are closer to being “maxed out”.
If I make $2,500 per month after taxes and I use every cent of it to pay for living expenses and to pay my debt obligations, once a crisis occurs (car breaks down, sickness, etc.) I will be pushed over the edge and will be likely to default.
7. Remove loans if borrower has had any delinquency
This is quite similar and most likely redundant with #2 “Remove loans if borrower has had any delinquencies in the last 2 years” in my last post. However, there is a fine distinction. In the downloaded data from the Lending Club website, there is a column entitled Delinquencies2Yrs and one entitled MnthsSinceLastDelinquency. As expected, the first column lists number of delinquencies in the last 2 years (0, 1, 2, etc.) while the second lists the months passed since last delinquency. Because I don’t want to lend money to borrowers with any prior delinquencies, I could probably get away with just filtering out loans with any nonzero month since last delinquency. However, as a failsafe, I perform both filters.
8. Remove loans with monthly payments greater than $750
$750 per month or $9,000 per year is a lot of money to most people. If they have any crisis, most people will have a tough time finding this money to pay their Lending Club loan obligation. So I filter out the higher monthly payment loans.
Next week I’ll get into a few more of my primary filters. I have 15 total, so I should be wrapped up in a few weeks. Later today or possibly tomorrow I’ll post my June monthly update, showing my June earnings for both my blog and Lending Club.
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