Do FinTech Lenders Fairly Allocate Loans Among Investors? Quid Pro Quo and Regulatory Scrutiny in Marketplace Lending

Abstract

Marketplace lending platforms select which investors will have the opportunity to fund loans. Platforms claim to fairly allocate loans between retail and institutional investors, but we provide evidence that contradicts this claim. Because of heavy regulatory intervention, platforms favor retail investors with lower defaulting loans, even after conditioning on observable information like credit scores and interest rates. Institutional investors appear to sway the platform; when the value of marginal loan volume from institutional investors is high, institutional investors are preferentially allocated lower defaulting loans. As platforms become constrained in their ability to produce similar quality borrowers, the value of marginal loan volume falls, and with it, the favorable allocation to institutional investors. The evidence suggests strategic platform behavior to maximize origination volume but also suggests a lasting effect of regulatory intervention in emerging capital market technologies.