Peer to peer loan descriptions: What’s in a name?

I’m an avid reader of the Lend Academy blog by Peter Renton, in fact, I recently reviewed his book about Lending Club, The Lending Club Story on the Funding Knight blog.

One of the reasons I love Lend Academy is the amount of information and analysis on offer for P2P enthusiasts.  Yes, it’s focused on the US market but it never fails to get me thinking…

This week, it’s the a guest post called Loan Descriptions – Can They Be Helpful When Choosing Loans? that has caught my eye.  Written by Sam Kramer, a financial sector old-timer and keen P2P investor (You can find him on Twitter @P2P_CT), the post delves into historical data to investigate whether the loan description that introduces a P2P loan is at all predictive of its eventual repayment rate i.e. can you predict which loans will default simply by reading their name?

Well, I won’t let all of the results out of the bag, you should head over to Lend Academy to read the full post for that (and subscribe since this is just the opener in a 2 -part guest slot) but here’s a taster to whet your appetite.

Default rate by loan description length

Top level analysis: Very short loan descriptions (between 1 and 10 characters) have a reasonably high default rate.  (Note, interestingly, no-description loans have a lower-than-average default rate, as do short loan descriptions of 11 – 350 characters).

The post goes on to look at the impact of longer descriptions as well as drawing attention the the impact that recency of loans will have – if no-description loans are a relatively new thing, then logic says they’ll have a lower default rate since less of them will have grown to maturity.

This latter point is relevant for virtually every piece of analysis you’ll see about peer to peer lending as the whole industry is so young.  Finding a way to compare default rates of very young ‘unseasoned’ loan books with the much more mature lending portfolios of mainstream banks could throw up some interesting analysis… any volunteers?

P2P to be regulated. Next stop, a change to the regulations on the treatment of peer to peer losses.

Last week’s news that peer to peer lending is about to be regulated by the FCA was met with pretty unanimous support from the industry, with both borrowers and lenders and the peer to peer lending platform owners themselves all agreeing that regulating peer to business lending is likely to boost rather than stifle peer to peer finance in the UK.

So that’s one battle won – or at least the first round, no doubt there is a whole host of further debate to come regarding exactly what shape the new regulation takes…

In the meantime, however, there’s an existing regulation that peer to peer lenders want changed – and that’s the treatment of losses.

Whereas banks and other financial institutions are able to off-set bad debt against interest earner, peer to peer lenders are not under current HMRC rules.

This is not only unfair but fundamentally compounds the impact of any peer to peer losses.   P2Pmoney.co.uk has helpfully crafted a suggested letter that anyone who agrees that the current state of affairs is wrong can cut and paste and send on to their local MP.

You can find the letter here on the www.p2pmoney.co.uk website.