Discrimination In P2P Lending?

A couple of economics professors have published a fascinating report, that raises a lot of questions about P2P lending.

The authors analyzed all loan applications listed during a one-year period on Prosper.com. They found that listings submitted with a picture of a African-American person — or no picture at all — were significantly less likely to get funded than listings from whites with similar financial information. If funded, African-Americans were subject to a slightly higher rate.

They also discovered some discrimination against older borrowers, overweight borrowers, and borrowers that they considered to be unattractive. They did find, however, that lenders discriminated in favor of members of the military and women (especially single women).

What complicates this picture, though, is that the site’s black borrowers were more likely to default (by 36%) than the white borrowers with similar financial information. In addition, members of the military were 49% more likely than non-military borrowers to default.

My take: I’ve commented before on what I consider to be the disingenuous marketing of P2P lending sites. Prosper’s claim that it was “created to make consumer lending more financially and socially rewarding for everyone” isn’t exactly supported by the professors’ findings.

Beyond this, though, the study raises legal issues (I think — I might be wrong here. I’m not sure what the legal requirements are regarding Prosper and other P2P sites). Banks are prevented from redlining — should P2P lenders be prohibited from discriminating, as well? And if there truly is discrimination happening, what is (or should be) Prosper.com’s role in identifying it or preventing it?

Seems to me that Prosper (and possibly other P2P lending sites) runs the risk of becoming just a way for the affluent to lend to the affluent. According to the study, while borrowers with a credit grade of at least 640 accounted for just 17% all listings, they comprised 46% of all funded listings. Is this really all that different from traditional banks?

I remain somewhat skeptical that P2P sites are going to make a big dent in the banks’ lending businesses, and even more skeptical of the sites’ claims to be providing a social service.

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8 thoughts on “Discrimination In P2P Lending?

  1. My take … every point made here validates p2p lending as bringing transparency and authenticity back to lending for borrowers and lenders alike.

    The rules for lending are broken. Borrowers identity has been narrowed down to a FICO credit score. Further its clear and this article confirms that FICO is not a fair assessment. I am not going to comment on the validity of any one p2p lender over another … thats for another debate.

    What I will say is that p2p lending will illuminate factors beyond the credit score and as we get enough data and breadth of borrowers, the information will drive out new factors in lending that have not been seen using FICO.

    Clearly the ramifications of truth in lending have to balanced against legal and common decency.

    Its incumbent on p2p lenders to ensure the platform offers truth and authenticity, while protecting users from illegal discrimination.

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  4. This was an eye opening post Ron. I usually do not express myself in the way I will do now.

    It proves once again that ethics and a fundamental belief in “do to others as you would have them do to you” needs to permeate all businesses.

    Human institutions, whether businesses or government, reflect the leaders who run them. Regulations and laws are effective only if the underpinnings are driven by leaders who believe in something greater than themselves.

    We used to call this trait “character.” Why do some many in our society find such thinking old fashioned, idealistic and somewhat beneath them?

    Your last statement is right on the mark.
    “ I remain somewhat skeptical that P2P sites are going to make a big dent in the banks’ lending businesses, and even more skeptical of the sites’ claims to be providing a social service.“

    I believe that true leaders find a way to do what is right regardless of the barriers they must overcome to do so.

  5. I’d love to know what Prosper’s culpability (or lack thereof) is with respect to anti-discrimination laws.

    FYI – They do not bear the “Equal Opportunity Lender” symbol on their website.

    Also, you know Prosper is monitoring this thread, so it’s sad to not see them in here commenting. Lawyers have them scared stiff, I’m sure. Too bad.

  6. @JP If Prosper is monitoring this thread, then I want to reiterate that my criticism of the site is strictly, and narrowly, concerned with the marketing-related comments the firm makes — and not the lending practices of the people who utilize the site.

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