1. Introduction

What is Lending Club?

Lending Club is a peer-to-peer lending company. The United States based company connects borrowers seeking loans with investors looking to finance loans and make a profit through loan interest payments through an online marketplace. Lending Club’s website claims they have facilitated over $42 billion dollars in borrowing and have more than 2.5 million customers.

The loan approval process:

Potential borrowers submit applications for loans to Lending Club. The company screens the applicants and, for approved applications, provides loan information, like a risk analysis, to investors. Investors can choose how much of a loan they wish to fund. An approved applicant receives their loan once it is fully funded.

What makes for a good investment strategy?

The goal of any investment strategy is to achieve an above average return on investment. A good investment strategy allows for an investor to exploit inefficiencies in the loan pricing market. This can be accomplished by investing in loans with low interest rates with a high probability of being repaid, while also investing in high interest rate loans that may have been incorrectly identified as high risk by Lending Club.

How to define discrimination and how to address it in our investment strategy?

Generally, there are two forms of discrimination that may exist in the Lending Club process:

  1. Individual-level: treating an entity differently based on a protected class, such as their gender, ethnicity, or sexual orientation; this is often refered to as disparate treatment

    Example: Lending Club refuses to approve a loan application for someone because they are Muslim

  2. Group-level: disproportionate adverse impact observed on members of a protected class; this is often referred to as disparate impact

    Example: Lending Club approves disproportionately more loans from white applications than it does for non-white applicants

Furthermore, there are two broad ways to address discrimination:

  1. At the time of model-building: specifying a loss function that is aware of features that should be protected.

    Example: A probability of default model that seeks to reduce false positive rates across all race categories.

  2. Making adjustments after the model has been built: combining model output with protected features when making decisions based on the model.

    Example: After ranking all loans by their potential return on investment, select the same proportion of loans from each race category.

Source: Prof. Julia Stoyanovich presentation to CS109 (Fall 2018)

Goals

  1. Craft a winning investment strategy that meaningfully beats the market by modelling relevant features of borrowing behavior to formulate a smarter return on investment (ROI) measurement.
  2. Assessing the extent to which discrimination against legally protected classes exists in Lending Club’s process and implementing alternative socially conscious investing options that still allow investors to make a profit.