Alternative Facts in Peer-to-Peer Loans? Borrower Misreporting Dynamics and Implications

Abstract

I study the implications and determinants of borrower misreporting in peer-to-peer (P2P) loans for credit card debt repayment and consolidation. I identify potential misreporting based on three behavior-based indicators: consistency of loan amount with outstanding credit balance, roundness of reported income, and roundness of chosen loan amount. A Misreporting Index constructed from these indicators has significant predictive power over the likelihood of default, and the additional default risk does not get compensated in the form of higher interest. Borrower misreporting is more prevalent in areas with lower social capital and among borrowers whose professions are considered less honest. Misreporting also increases notably in the period following the Trump inauguration, and the increase is larger among low-income and low-credit-grade borrowers.