Private Information, Credit Risk and Graph Structure in P2P Lending Networks

This research investigated the potential for improving Peer-to-Peer (P2P) credit scoring by using “private information” about communications and travels of borrowers. We found that P2P borrowers’ ego networks exhibit scale-free behavior driven by underlying preferential attachment mechanisms that connect borrowers in a fashion that can be used to predict loan profitability. The projection of these private networks onto networks of mobile phone communication and geographical locations from mobile phone GPS potentially give loan providers access to private information through graph and location metrics which we used to predict loan profitability. Graph topology was found to be an important predictor of loan profitability, explaining over 5 1⁄2% of variability. Networks of borrower location information explain an additional 19% of the profitability. Machine learning algorithms were applied to the data set previously analyzed to develop the predictive model and resulted in a 4% reduction in mean squared error. 1. The Peer-to-Peer Lending Industry Peer-to-peer lending (P2P lending) involves the lending money to individuals or businesses through online services that match lenders with borrowers. The advantages of P2P lending arise from most business being conducted online; disadvantages arise from the perceived higher default risk than with loans made face-to-face, a perception that we investigated here. Many P2P loans are unsecured personal loans, though some of the largest amounts are lent to businesses; other forms of P2P lending include student loans, commercial and real estate loans, payday