Loan Default Fairness
A profit-optimized credit risk model.
Built on 1.3M LendingClub loans, this project develops a profit-aware credit risk model that replaces accuracy with expected profit as the deployment objective. It combines temporal validation, probability calibration, explainability, and a fairness audit to evaluate the business trade-offs behind lending decisions.
How it works
Expected profit on 2017 — a year the model never saw, from a decision rule tuned for money instead of accuracy. $182.26 per loan.
Why profit, not accuracy
A repaid loan returns about +10% of principal. A default loses about −50%. The two mistakes are not equally expensive — a five-to-one asymmetry.
A model tuned for accuracy treats them as interchangeable. One tuned for profit doesn’t — it rejects aggressively to avoid the costly approvals.
That single choice sets the threshold and shapes the fairness problem that surfaces later.
Would this borrower be approved?
Change the profile and watch the decision flip at the deployed cutoff. Each bar is a feature pushing default risk up or down — the same idea as a SHAP explanation.
The metrics held, the profit didn’t
On 2017, ranking and calibration barely moved — AUC 0.7281 → 0.7188, Brier almost flat. The threshold held too: re-tuning on the real labels recovers just 1.4%.
And yet, per-loan profit slipped. Statistical health hid an economic softening.
Who gets rejected
One profit-optimal threshold rejects unevenly. Disadvantage compounds where income and home ownership meet.
A low-income renter is rejected 76.7% of the time against 47.1% for a high-income owner. A single calibrated threshold over groups with different base rates cannot equalize error rates and stay calibrated — the disparity is structural, not a bug.
What fairness costs
Fairlearn’s off-the-shelf optimizer broke — it approved almost everyone, turning $65.6M of profit into a nine-figure loss, because it optimizes accuracy, not money.
A custom profit-aware per-group threshold works: every group clears the four-fifths line at a measurable cost. But there is no free lunch — the baseline is both the most profitable and the least fair.
| Fix | Profit | Cost |
|---|---|---|
| Baseline | $65.57M | — |
| Income tier | $61.23M | −6.6% |
| Home ownership | $61.33M | −6.5% |
| Income × home | $59.84M | −8.7% |