What factors are causing the sudden increase in default rates for Lending Club's small business loans over the last 6 months?

Introduction

The sudden increase in default rates for Lending Club's small business loans over the last 6 months is a critical issue that requires immediate attention. This analysis will systematically identify, validate, and address the root cause while considering both short-term and long-term implications for the business.

I'll approach this problem by first clarifying key details, ruling out external factors, and then diving deep into the product, user journey, and metrics. From there, I'll generate and validate hypotheses, conduct root cause analysis, and propose a comprehensive resolution plan.

Step 1

Clarifying Questions (3 minutes)

• Looking at the timing, I'm thinking there might be a correlation with recent economic events. Has there been any significant change in the macroeconomic environment affecting small businesses in the last 6-9 months?

Why it matters: Economic shifts can dramatically impact small business performance and loan repayment ability. Expected answer: Possible mention of inflation, interest rate changes, or sector-specific challenges. Impact on approach: If confirmed, we'd need to factor in economic resilience in our lending criteria.

• Considering the specificity to small business loans, I'm curious about our risk assessment model. Have there been any recent changes to our underwriting criteria or risk assessment algorithms?

Why it matters: Changes in risk assessment could directly impact the quality of loans approved. Expected answer: Information about recent model updates or lack thereof. Impact on approach: If changes occurred, we'd need to evaluate their effectiveness and potentially rollback or refine them.

• Thinking about user behavior, I'm wondering if we've seen any shifts in the types of businesses applying for loans. Has there been a change in the industry mix or average loan size in our small business portfolio?

Why it matters: Different industries or loan sizes may carry varying levels of risk. Expected answer: Data on portfolio composition changes. Impact on approach: Significant shifts would prompt a review of our industry-specific risk models and loan size policies.

• Considering operational factors, I'm curious about our collections and early intervention processes. Have there been any changes in how we manage loans that show early signs of distress?

Why it matters: Effective early intervention can significantly reduce default rates. Expected answer: Information on recent changes in collections strategies or resources. Impact on approach: If processes have remained static, we might need to enhance our early warning systems and intervention strategies.