Posted by Joaquin Delgado :: June 23, 2007 @ 6:48 am

LendingMatch™: Diversification and Matching

Diversification in finance involves spreading your money around into many types and numbers of investments. When it comes to Lending Club, we offer various loan classes, ranging from A to G for lenders to choose from. At any given time a lender may decide to lend a given amount of money which can be allocated across a number of selected loans from different classes, thus forming a diversified loan portfolio.

The goal of LendingMatch™ is to help the user build a loan portfolio in such a way that their allocations are optimal with respect to the specified lender's risk/reward utility function, and match their "profile" and "risk criteria" for each portfolio while keeping the overall loan portfolio "diversified". This is generally considered a search and matching as well as a loan allocation optimization problem.

We provide two routes for lenders to build their loan portfolio: a) via a recommendation that takes into account your return goals and generates a suggested portfolio and b) build your portfolio a-la-carte with browse and search functionalities. You can also start with a recommendation and then continue a-la-carte.

In both cases the system generates a LendingMatch™ rank for each loan that has both a personalization component (specific to the lender and lender-borrower pair, including affinities and connections through social networks) as well as a loan component that considers other factors such as remaining amount to fund and time to close.

This rank is used to select loans in the recommendation process as well as to display results to the user when they search or browse the loan inventory. At the same time the system has to be able to optimize the processing of loans with respect to the existing inventory to ensure proper money flow between lenders and borrowers.

Some immediate questions that come to mind are:

• How does LendingMatch™ consider the "connections" between the lender and borrower?
• What is the "optimal" portfolio that can be constructed from a given set of loans which have the lowest risk for a given value of the expected return?
• How many loans should the portfolio(s) contain in order to be considered "diversified”?
• Can a lender concentrate their funds on a few loans and still be diversified?
• How is “concentration” measured?

Stay tuned for a deeper dive into these questions!

Joaquin