NETWORK ECONOMIES

peer-to-peer lending
Quantitative Analysis Review

Pattern Recognition
MIT Media Lab Class

January 16th 2009

contact: Ray Garcia

rgarcia@media.mit.edu

Copyright 2009
OVERVIEW

Synopsis of Research Results

• Predictive Accuracy
• Predictable with 80% accuracy Loan conversion and defaults
• Able to detect borrowers financial health by payment record

• Social Factors
• Increase odds of getting a loan when financial features are similar
• Evidence of preferential attachment with threshold number of bids

• Probable lender biases

• Demonstrated the textual information influences a loan
• Shows that images posted by borrower matter

2
OVERVIEW

Business Implications

• Tools may need to be provided

• For borrowers who need help to increase their odds of getting a
loan
• For lenders to detect pending defaults.
• For P2P to manage risk

• Existing Social Networks should be exploited

• As loan volume increases the likelihood of similar financials
becomes greater therefore the social aspects of assessing the
quality of the borrower becomes more important.
• User may be reluctant to build a social network on a P2P site
when they have already done so elsewhere
• Social networks may have a natural affinity for lending therefore
increasing loan volumes.
3
OVERVIEW

Recommendations

• Continue academic research with peer review publication for

validation

• Complete a statistical profiling of full set of p2p data (not

sampling)

• Use existing text, social, images, to determine qualitative voice of

customer

• Analysis tools needed before having a secondary market of

bundled loans

• Develop game model of p2p lending using info-economics theory

• Simulate social interaction networks impact on p2p lending

model

• Test predictive model simulated against similar data samples 4

INTRODUCTION

Pattern Recognition Class

• MIT ML Professor Roz Picard Phd. teaching the course

• Teaching Assistant, Dawei Shen (Phd. candidate in Viral

Communications)

• CFB Events invite Prosper.com and Virgin Money to present at MIT

• MIT Faculty and students take an interest in Peer to Peer Lending

• CFB (Ray Garcia) presents P2P Lending to the Pattern Recognition

class.

• 7 researchers (students in class) interested in Peer to Peer Lending

• 2 Teams research P2P Lending using Pattern Recognition

5
INTRODUCTION

Research Teams analyzing P2P Lending

• Lending Activity Team Social Capital Impact Team

• Coco Krumme • Sergio Herrero

• Charlie DeTar • Rahul Bhattacharyya

• Matt Aldrich • Aithne Sheng-Ying Pao

• Ernesto Martinez-
Villalpando

6
INTRODUCTION

Outline of Analysis

• Research Inquiry
• Review of prior P2P analysis using descriptive statistics
• Analytical results: classification, feature selection,
neural networks
• Suggested tools / applications for borrowers, lenders,
P2P vendor
• Conclusions

7
RESEARCH INQUIRY Analysis of P2P Lending Activity

Analysis from several perspectives

• Borrowers: how to improve chances of getting a loan?

• Lenders: how to maximize returns by choosing the best loans?
• Social Interaction: what are the implications of the network
relationships

• P2P Vendor:
• increase loan conversion,
• create tools to help borrowers and lenders
• identify loans before default

• P2P stakeholders & competitors:

• what borrower profiles are best served by P2P versus a traditional
lender? 8
P2P RESEARCH Analysis of P2P Lending Activity

Data Used in the Analysis

9
P2P RESEARCH Analysis of P2P Lending Activity

Descriptive Statistics
• Data from past 3 years: 340K listings, 29K loans
• Distribution of credit scores, loan status

10
P2P RESEARCH Analysis of P2P Lending Activity

Descriptive Statistics
• Geographical distribution of members
Darker green indicates
more
members                                                

11
P2P RESEARCH Analysis of P2P Lending Activity

Previous Research Findings by Stanford

GSB

• Research used Regression analysis of financial and social factors

• Group membership and endorsement increases loan funding significantly
• Credit Score and Verified Bank Account are financial factors most correlated with
high funding rate
• Reference: http://www.prosper.com/Downloads/Research/Prosper_Regression_Project-Fundability_Study.pdf

CURRENT analysis is multi-factor,

utilizes advanced feature selection,
considers unequal prior probabilities
and a variety of data models

12
ANALYTICAL RESULTS Analysis of P2P Lending Activity

Data reveals patterns

13
ANALYTICAL RESULTS Analysis of P2P Lending Activity

Loan conversion/default
predicted ~80% accuracy

• Predict loan conversion, default with ~80% accuracy (neural net not shown)

14
ANALYTICAL RESULTS Analysis of P2P Lending Activity

Optimal feature set to predict

conversion/default

• Identified 96 features (including text, social metrics)

• Ranked using floating feature selection

Top 8 features:

- Amount Delinquent
- Open Credit Lines
- Amount Requested 
- Borrower’s Max Rate
- Credit Grade
- Debt to Income Ratio
- Funding Option
- Endorsement

15
ANALYTICAL RESULTS Analysis of P2P Lending Activity

The crucial 20%: human judgment & text

analysis

• Human judgment is key in loan funding - factors such as description,

image
• # prior bids counts (75% threshold): we want to fund already-
supported listings

16
 Analysis of P2P Lending Activity
Decision
TOOLS Tree Analysis
help borrowers get loans (increase loan
conversion)

• Decision tree predicts loan

conversions and defaults

• Borrower can control

requested amount and
interest rate

• Interactive tool to help

borrower set optimal
amount, rate

17
TOOLS Analysis of P2P Lending Activity

Decision Tree to identify

probability of loan defaulting (before lending)

• Before lending, use decision trees to identify risky borrowers

• Tool for default insurance, securitization of loans

18
TOOLS Analysis of P2P Lending Activity

Identify loans pre-default

using Hidden Markov Model

• 3-state “financial health”

model
• Prosper could offer support
to borrowers before
default
• prediction error decreases
with longer observation
series

19
 Analysis of P2P Social Impact

Research Inquiry on Social Capital

• How social capital influence peer-to-peer lending?

• “Friends”: Direct relationship. intends to motivate other lenders to bid

on second degree friends based on indirect trust.

• “Endorsements”: Feedback on previous transactions with other

users.

• “Groups”: Users are allowed to form communities. Group members

help each other and the group rating depends on their performance.
Peer pressure

20
FEATURE SELECTION Analysis of P2P Social Impact

Social versus Financial Components

Social Profile Financial Profile

• Group Leader Reward Rate • Borrower Maximum Rate

• Endorsement Number • Credit Grade

• First Degree Friend Number • Debt To Income Ratio
• Second Degree Friend Number • Amount Requested
• Group Rating • Is Borrower Homeowner
• Group Size

21
FEATURE SELECTION Analysis of P2P Social Impact

Importance of Social Features

3 bidding forces involving “social 
• Most important features
interaction” behavior
• Credit Grade • Bids from First Friends
• Bids from Second Friends
• 3 Bidding Forces
• Bids from Group Members

• Least important Social Capital

features:
• Group Leader Reward Rate
• Group Size
• Number of first degree Friends

22
 Analysis of P2P Social Impact

Cluster Analysis of Bids

23
 Analysis of P2P Social Impact

Cluster Analysis of Group Rating

24
 Analysis of P2P Lending Activity

Conclusions from Lending Activity Analysis

1. Data is separable and has identifiable patterns

2. Non-obvious features do play a significant role

3. Factoring Human judgment is important consideration

Recommendation:
Create useful tools for borrowers and lenders to help foster P2P
activity.
These tools should be based on decision tree and HMM models.
Development of risk models should be explored using these
techniques.

m: Coco Krumme, Charlie deTar, Matt Aldrich, Ernesto Martinez-Villalpan

25
 Analysis of P2P Social Impact

Conclusion from Social Impact Analysis

“Social features” do not replace “financial features”.

But….they are the best complement for differentiation when

comparing similar financial profiles.

Users do not have time to maintain many social profiles

Recommendation:

P2P lending should use existing social networks as a

foundation, instead of building their own.

Team: Aithne Sheng-Ying Pao, Sergio Herrero, Rahul Bhattacharyya

26
P2P RESEARCH Analysis of P2P Lending Activity

loan or no loan?
default or pay?
Analysis Method

Introduction
feature  separation  graphical 
Descriptive
selection methods models
statistics

Suggested
Neural decision  TOOLS 
greedy
Nets trees for 
Peer to Peer
Linear
Lending
floating Discriminant
Analysis bayesian 
networks
Principal Support
Component Vector
Analysis Machine

Hidden 
experimental  Markov Model
mechanical 
methods  loan performance
turk
group 
performance

27
 Analysis of P2P Social Impact

Summary of Pattern Recognition Models

Applied
Conclusions remain consistent across different Models
• Descriptive Statistics
• Linear Regression
• Principal Component Analysis
• Support Vector Machine
• Artificial Neural Network
• Linear Discriminant Analysis
• K-Nearest Neighbor
• Fisher Algorithm
• Pudil’s Algorithm
• Bayesian Nets
• Decision Trees
• Hidden Markov Model
• Human Qualitative Classification

28
References for Further Study
• MIT Pattern Recognition Course Information:
• http://courses.media.mit.edu/2008fall/mas622j/

• Complete MIT Pattern Recognition Study:

• http://courses.media.mit.edu/2008fall/mas622j/Projects/CharlieCocoErnestoMatt/#contents
•
http://courses.media.mit.edu/2008fall/mas622j/Projects/SergioAithneRahul/SocialInteractionsInP2PLending.pdf

• Prior Research
• Prosper.com for information on p2p lending
• Stanford Business School regression analysis of prosper.com data
• http://www.prosper.com/Downloads/Research/Prosper_Regression_Project-Fundability_Study.pdf
• Stanford Podcast by Chris Larsen CEO of Prosper.com
http://ecdev.stanford.edu/authorMaterialInfo.html?mid=1576

• Books:
• The Complete Guide To Prosper.com by Sean Bauer
• Happy About People-to-People Lending With Prosper.com by Roger Steciak

• Competitor list:
• VirginMoneyUS.com, Zopa.com, LendingClub.com, Loanio.com, Circlelending.com, FundMyNotes.com

29