Do FinTech Lenders Fairly Allocate Loans Among Investors? Quid Pro Quo and Regulatory Scrutiny in Marketplace Lending

Abstract

Marketplace lending platforms select which investors will have the opportunity to fund loans. Platforms claim to fairly allocate loans between retail and institutional investors, but we provide evidence that contradicts this claim. Institutional investors are allocated loans with lower default rates after controlling for interest rates, consistent with a quid pro quo exchange for volume commitments. However, when regulators are most likely to monitor the platform, we find that institutional-investor favor wanes, and platforms redirect lower default rate loans to retail investors. The evidence suggests platforms adjust allocation behavior to avoid costly regulatory intervention.