Essays on Retail Lending



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My dissertation consists of three essays on retail lending. In the first essay, using data from Lending Club and Prosper, the two largest peer-to-peer lenders in the U.S., I provide evidence of adverse selection in the online personal lending market. Borrowers who were rejected by a competitor are twice as likely to default as borrowers who were not rejected, conditional on receiving the same contract. Borrowers are also more likely to default when offered higher interest rates or smaller loan amounts by a competitor. Surprisingly, the loan amount effect is larger than the interest rate effect. Loan amount is also more closely related to lender choice than is interest rate. In the second essay, with Dimuthu Ratnadiwakara and Kevin Roshak, we find that modest differences in the interest rate at loan origination can have long-lasting effects on mortgagors. We use monthly fluctuations in the national mortgage rate at loan origination to study small changes in interest rates across home purchases made in the same year, in the same area, and which eventually reach similar levels of negative equity. A 50bp higher national rate at origination corresponds to an extra $550 in payments per year and, during the bust, an increase in defaults of 68–88 bp within 12 months of reaching negative equity. The effect is large relative average default rates of 3.78% (5.39%) for homes with 10% (30%) negative equity. Consistent with liquidity constraints, the magnitude of the effect is relatively constant across different levels of negative equity. The national mortgage rate is not correlated with worse borrower credit quality. During the boom, smaller mortgage payments result in increased consumption of non-durables and services from 2001–2007, while total expenditure is unchanged. If intermediaries resist large concessions to borrowers, small concessions may be more effective. In the third essay, I investigate loan stacking, a phenomenon wherein borrowers receive multiple loans from different lenders at approximately the same time, often without the lenders being aware of each other’s loans. I evaluate the performance of stacked loans, expecting that stacked loans should perform worse. I also evaluate whether the poor performance of stacked loans is driven by fraud, or simply by borrowers taking on more debt than they can afford.



Peer-to-peer lending, Loans, Financial intermediation, Mortgages