Why Lending Club Doesn't Verify Income for All Borrowers
We believe that verifying a borrower's income or income source may be useful in certain circumstances for screening against exaggerated income and for validating the borrower's ability to repay a loan. However, we believe it is not necessary to verify this information for all borrowers. As shown below, historical data indicate income verified loans perform similarly to loans that are not income verified. We also believe that verifying income on all loan requests could lead to adverse selection; many lenders offer credit without income verification and our more creditworthy borrowers might choose to apply elsewhere if our application requirements are more onerous. Furthermore, universal income verification would tie up investor capital for longer by lengthening the funding period of the average loan.
Lending Club's practice of verifying income for only a limited portion of borrowers is not unique. In fact, we verify income more often than many other lenders, such as credit card issuers. Credit card issuers are not required to verify income or employment and in practice, rarely do so3. The Bureau of Consumer Financial Protection writes that credit card issuers should have the flexibility to decide when they need to verify borrower information in part because verifying this information for all borrowers would increase approval times and inconvenience consumers4.