Lenders Properly Assessing Risk?

Prosper provides a reasonable amount of information on the borrowers to allow lenders to estimate risk. I've been quite curious, however, on how well the lenders are interpreting this information and generating risk-adjusted bids on loans. To that end, it's time for some more data crunching.

My handy-dandy tools have calculated the distress rate (loans in all the bad status categories from Late to Defaulted) for various interest rate bands.

Start	End	Distress Rate	Spread
0.00%	5.00%	12.82%	-10.32%
5.00%	7.50%	1.92%	4.33%
7.50%	10.00%	1.44%	7.31%
10.00%	12.50%	2.89%	8.36%
12.50%	15.00%	4.01%	9.74%
15.00%	17.50%	5.72%	10.53%
17.50%	20.00%	5.91%	12.84%
20.00%	22.50%	9.99%	11.26%
22.50%	25.00%	14.29%	9.46%
25.00%	27.50%	15.06%	11.19%
27.50%	30.00%	21.54%	7.21%
30.00%	40.00%	62.07%	-27.07%

Looking at the table broadly, risk is priced reasonably well except for loans below 7.5% and above 30%. The table's middle section has a slowly increasing distress rate that implies that, roughly speaking, lenders are placing risk reasonably. I have to assume that the loans below 7.5% are sweet-heart deals brokered between people who know each other, because it doesn't make financial sense. The CD rates (risk free) have been in the 4.5% - 5% range for a while, and a collateralized home loan has been around 6%. Well, for whatever reason it was a bad risk. Equally, anyone who wants a loan at over 30% appears to be a bad risk as the interest rates are obviously not covering the risk.

My rule of thumb has been that a 1% increase in distress rate should be compensated for by a 1% increase in the interest rate. This was captured in the Spread column. An increasing spread corresponds to improving lender return. Looking at the table, lenders are getting a good deal. Many ranges approach 2% increases in interest rates for a 1% increase in risk. The lender sweet spot is coming in for loans in the 20% area.