Abstract
This paper studies the peer-to-peer lending and loan application processing of LendingClub. We tried to reproduce the existing loan application processing algorithm and find features used in this process. Loan application processing is considered a binary classification problem. We used the area under the ROC curve (AUC) for evaluation of algorithms. Features were transformed with splines for improving the performance of algorithms. We considered three classification algorithms: logistic regression, buffered AUC (bAUC) maximization, and AUC maximization.With only three features, Debt-to-Income Ratio, Employment Length, and Risk Score, we obtained an AUC close to 1. We have done both in-sample and out-of-sample evaluations. The codes for cross-validation and solving problems in a Portfolio Safeguard (PSG) format are in the Appendix. The calculation results with the data and codes are posted on the website and are available for downloading.
Highlights
Peer-to-peer lending, known as person-to-person lending, social lending, or P2P lending, commonly abbreviated as P2PL, is usually the online practice of individuals lending money to other individuals without going through a traditional financial intermediary
We maximized area under the receiver operating characteristic (ROC) curve (AUC) with the spline-transformed features, where the initial point is set to the solution of the buffered AUC (bAUC) maximization problem, see PROBLEM 411
Portfolio Safeguard (PSG) codes for Logistic Regression, bAUC maximization, and AUC maximization are in Appendix A
Summary
Peer-to-peer lending, known as person-to-person lending, social lending, or P2P lending, commonly abbreviated as P2PL, is usually the online practice of individuals lending money to other individuals without going through a traditional financial intermediary. It involves people with extra money (investors), people who need money (borrowers), and a platform (website) that facilitates P2PL (see LendingClub (2006)). The most important task of a platform is to distinguish loan applicants who will pay money back from those who will default. PROSPER began operations in February 2006 and was the only P2PL company in the U.S until LendingClub was founded in May 2007 in San
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