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Cleveland Fed report comparing P2P lending to subprime mortgages removed for revision

21 November 2017  |  4390 views  |  0 wrong way

A Federal Reserve Bank of Cleveland report which compared the peer-to-peer lending industry to the subprime mortgage market has been temporarily taken offline after questions were raised about the underlying data set.

The recently published report concluded that three often-made claims about P2P lending - that it helps people refinance previous, expensive, loans; that it helps borrowers build a better credit history; and that it serves the underbanked - are not true.

In fact, the researchers argued that P2P lending actually resembles "predatory loans" in terms both of who takes them out and the impact on borrowers' finances. The industry, they warned, has the potential to destabilise consumer balance sheets, with loan performances bearing a striking resemblance to the subprime mortgage market before the 2007 crisis.

The report was based on what was described as credit bureau data on 90,000 people who took out P2P loans between 2007 and 2012, which was compared to 10 million traditional borrowers.

However, the Market Place Lending Association - which represent the likes of Lending Club, Prosper and Funding Circle - questioned the data set. In an article for American Banker, the association's executive director, Nathaniel Hoopes, says the researchers "actually relied on data from a much broader category of loans".

With TransUnion, which provided the data set, confirming that it contained non P2P loans, Hoopes called for the Cleveland Fed to temporarily retract and revise its report, which has left the industry's reputation "unfairly tarnished".

Hoopes' demand has now been met, with the report removed from the Cleveland Fed site and replaced with a brief note explaining that the "authors have received several questions about the composition of the underlying data set they used in their analysis".

Concludes the message: "In light of the comments received, the authors are currently revising their paper to further clarify the data sample they used in the study. Their revised paper will be posted as soon as it is completed."

As noted by Hoopes, the Cleveland report is at odds with a previous study from the Philadelphia and Chicago Feds. Based on Lending Club data, that report found that P2P lending offers the underserved access to loans at fair prices.

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