Income Rounding and Loan Performance in the Peer-to-Peer Market

Abstract

This paper uses a unique dataset from Lending Club (LC), the largest online lender in the U.S, to analyze the impact of income rounding on loans performance. We find that rounding of income by a borrower may be associated with adverse loan outcome. Borrowers with a rounding tendency are more likely to default and less likely to prepay than borrowers with more accurate income reporting. Furthermore, investors are not compensated for the extra risk associated with rounding. Borrowers who misreport income by means of rounding obtain lower interest rates and larger loans with longer maturity than those who do not round.

Keywords: Peer-to-Peer (P2P) lending, Rounding, Misreporting, Performance

JEL Classification: D12, G02, G20