Fintech platforms: Lax or careful borrowers\u2019 screening?

Serena Gallo

doi:10.1186/s40854-021-00272-y

Abstract

Can peer-to-peer lending platforms mitigate fraudulent behaviors? Or have lending players been acting similar to free-riders? This paper constructs a new proxy to investigate lending platform misconduct and compares the FICO score and the LendingClub credit grade. To examine whether the lack of verification by the Fintech platform affects lenders’ collection performance, I explore the recovery rate (RR) of non-performing loans through a mixed-continuous model. The regression results show that the degree of prudence taken by the lending platform in the pre-screening activity negatively affects the detection of some misreporting borrowers. I also find that the Fintech platform’s missing verification information (e.g., annual income and employment length) affects the RR of non-performing loans, thereby hampering lenders’ collection performance.

Highlights

This paper examines Fintech marketplaces’ role1 in affecting the credit quality of and detecting fraudulent behavior by borrowers
Evaluation of prescreening activity The weakness of the control system could incentivize some borrowers to inflate or falsify their self-reported information. These sections investigate the prescreening quality at the time of loan origination, using as a proxy of platform misconduct the degree of prudence adopted by the platform in allocating borrowers in specific risk classes
The empirical analysis is performed with loan-level data from LendingClub, including current loans issued between July 2007 and September 2018

Summary

Introduction

This paper examines Fintech marketplaces’ role in affecting the credit quality of and detecting fraudulent behavior by borrowers. Referred to as peer-to-peer (or P2P) lending, have become abundant by gaining huge market shares in consumer and small business loans over the last decade. P2P platforms are designed as a two-sided marketplace that, through leveraging innovative technologies, enables investors to lend to borrowers directly and provide broad benefits in cost and speed investment decisions. Some suspect that the reliability of the P2P lending market has decreased over the last few years.. In 2016, the Department of Justice (DOJ) and Securities Exchange Commission (SEC) accused LendingClub of false statements to financial institutions, wire fraud, and covered conduct. Renaud Laplanche was removed as CEO of the company by the board of directors. All the fraudulent activities were aimed at

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