2. It's really not non-custodial, because one has to send funds into the LC wallet to trade. How does giving the user the private key mitigate LC being hacked and the hackers also getting everyone's private keys there?
(By contrast with HodlHodl, HH is really non-custodial, because the user send funds directly into the active trade's escrow.)
-snip-
As said above, the wallet is created locally, and if you lose your credentials, there is no way to recover the funds.
But if you're paranoid about the "wallet creation" process, you can simply connect your Ledger device or MetaMask and use your funds directly. That way, you won't have to deposit anything on their platform.