Show Us Your Pay Stub: Income Verification in P2P Lending

Abstract

Peer-to-peer lending is an alternative credit market that allows individual borrowers and lenders — people like you and me — to engage in credit transactions without traditional banking intermediaries. This research centers on income verification practices in peer-to-peer lending. We report on a descriptive analysis of all the loans that were funded through Lending Club, currently the world's largest peer-to-peer lending platform, with issue dates before September 1, 2012. The score that Lending Club assigns to a requested loan is supposed to encapsulate all the information that is needed for the lender to assess the risk of a potential default, This study points, however, to a potential weakness of Lending Club’s loan assessment tools, which indicates that information about a loan’s income verification status is in fact relevant and has value. Given this understanding, lenders’ choices are surprising. Lenders that are registered directly on Lending Club’s platform, including a crowd of small investors, fund a higher percentage of the listed loan amount when the borrower’s income is not verified, while all other investors display the opposite, traditional risk-averse behavior.