[Related to the Apply the Concept on page 489] An article in the Wall Street Journal noted that online peer-to-peer
lenders “have automated the processes of checking borrowers’ credit metrics and looking up their histories while
in many cases avoiding more labor-intensive practices of
collecting and reviewing pay stubs or tax returns.” The
article also noted, “Charge-off rates, which reflect loans
on which a lender doesn’t expect to collect, have risen.”
a. Why do banks require borrowers to submit pay stubs
and tax returns when applying for a loan? Why would
online lenders skip this step in the loan application
process?
b. If online lenders find that borrowers are defaulting on
loans at higher-than-expected rates, can they offset
the problem by charging higher interest rates on the
loans? Briefly explain.
Source: Telis Demos and Peter Rudegeair, “LendingClub’s Newest
Problem: Its Borrowers,” Wall Street Journal, July 12, 2016.