Recently there was an article in Bloomberg (Article Link) that talked about how online lenders are not always verifying the basic borrower information like Income. Subsequently it got picked up by websites like Yahoo & Business Insider (Article Link) generating some sensational headlines.
Though both articles did mention that sites like Lending Club use various indicatiors and some Machine Learning models to determine whether they need a manual verification of the income, but that detail was hidden. We at Croudify have been analyzing the loan data for more than 2 years and wanted to shed some light on the article and show that while the headline is true the devil is in the details and actually the platforms have been doing a very good job in identifying the fraud.
% of Loans with Non verified Incomes
Our First step in analysis consisted of identifying how many loans for which Income has not been verified by Platforms. For our analysis we chose Lending Club data. If you see the graph below you will see that in early years (2008) nearly 85% if the loans were originated without Income Verification. This can be attributed to lack of resources and originating business practices. Off late (since 2011) nearly 1/3rd (33%) of loans had that status. So the trend is not particularly new from a historical perspective. Actually if you look historically as platforms have grown they are verifying more incomes and not less as the headline would have you believe.
Performance of Non Verified Loans
Once we had concluded that the non-verified loans are not growing as percent of population the logical next step was to check if these loans are performing worse than before. Is there a possibility that the loans without income verification have deteriorated over time and hence the red flag.
Here the analysis showed us a completely opposite result. The loans for which Lending Club had decided not to verify the income has performed better historically and continue to outperform the overall population. This points to a very important finding that the preliminary indicators that Lending Club is using in identifying the fraudulent behavior is not only working it is working great and is providing a performance lift to loans.
This is a very important discovery and points that what was true in old world with traditional lending is no longer true with the new world with Online lending and advance Machine Learning models and we as investors need to change our thinking accordingly.