Around a month ago Lending Club instituted a new policy which does not allow lenders to write specific questions to borrowers any more. Now lenders must select from a short list of predetermined questions which do not include the questions that many lenders are the most interested in such as what type of job the borrower has. Although I am not a lender with Prosper.com I have read that they recently made similar changes to their lending platform as well. The stated reason for all of these changes has been that the websites are attempting to better protect the borrowers' privacy. However, this policy really hinders the investor's ability to distinguish between good and bad loans. Many lenders have left the website all together as a result of this new policy.
I have continued to invest with the website despite my disapproval of this new policy. However, there is one significant change that I have made to my investing strategy. Previously I invested exclusively in borrowers with verified incomes. Now income verification is not a requirement in my investment criteria. My reasoning for this change in philosophy is below.
I am certain that nearly every borrower used to be asked by at least one lender to have their incomes verified. I know this because in many cases I was one of the lenders making this request. The response that I liked to see most was something along the lines of "Lending Club has not contacted me about this but I will call them and get it done." Many of the borrowers had no idea that getting their income verified was even an option until it was suggested by a lender. Lending Club selectively picks certain borrowers to verify their income based on some sort of algorithm which finds borrowers that are higher risk or more likely to be lying. Therefore, it has actually been shown that loans with unverified incomes have actually been performed slightly better than loans with verified incomes in a Reuters blog. However, I have always been comforted by loans with verified incomes because the income plays such a huge role in my decision to invest. Now that borrowers will only have their income verified if they are "red flagged" by Lending Club it is likely that the unverified loans will perform significantly better in the future than verified loans. I certainly don't ignore loans with verified incomes because I think it is still valuable with my investment process however I no longer ignore loans with unverified incomes either.
Hopefully in the future lenders will once again have the ability to ask personalized questions. However, for the time being I will try to adapt to the new changes. I am keeping track of the loans with unverified incomes by putting them in a separate portfolio and I will keep you updated as to which loans perform better in the future.
