FED Research Hits Claims of P2P Lending Advocates

In a paper published last week, FT Alphaville reports, Yuliya Demyanyk, Elena Loutskina, and Daniel Kolliner from the Federal Reserve Bank of Cleveland examined

a comprehensive set of credit bureau data to examine P2P borrowers, their credit behavior, and their credit score

demonstrating that there is little evidence of unique benefits to consumers.

In fact, P2P loans resemble predatory loans in terms of the segment of the consumer market they serve and their impact on consumers’ finances.

Three questions

The researchers investigate three questions: Are P2P loans used to refinance previous loans, do P2P loans help borrowers build a better credit history, and do P2P lenders serve individuals or markets underserved by traditional banks?

1. Are P2P loans used to refinance previous loans?

The results show that credit card debt increases for P2P borrowers. P2P borrowers exhibit a 47 percent increase—rather than a decrease—in their credit card balances after obtaining P2P credit as compared to matched non-P2P borrowers.

2. Do P2P loans help in building a better credit history?

Our results suggest that the credit scores of P2P borrowers fall substantially and delinquency rates rise after taking on a P2P loan compared to non-P2P borrowers.  (Figure 4). We also discovered that numerous measures of derogatory events (number of past due accounts—both revolving and installment—and number of bankruptcies) significantly increased for borrowers who took out P2P loans. These results indicate that P2P loans have the capacity to worsen borrowers’ prospects for future access to financing.

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3. Do P2P lenders serve individuals or markets underserved by the traditional banking system?

In this respect, the researchers found out that:

P2P borrowers are characterized by lower income levels, lower credit scores, and a higher number of delinquencies.

More in particular,

These borrowers are more likely to be African American and not have a college degree. At the same time, P2P borrowers’ levels of debt-to-income ratios tend to be similar to non-P2P borrowers’. This evidence once again indicates that P2P borrowers are unlikely to be underbanked but are likely to be overleveraged even prior to obtaining their P2P loans.

Impacts on the P2P Market

The consequence is that signs of problems in the P2P market are appearing. In particular, they observed that:

defaults on P2P loans have been increasing at an alarming rate, resembling pre-2007-crisis increases in subprime mortgage defaults, where loans of each vintage perform worse than those of prior origination years (Figure 1).

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Find out more here and here.

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