Peer to peer lending in depth

• A. To issue government-backed bonds to individual investors
• B. To match individual borrowers directly with individual lenders, typically online
• C. To provide insurance coverage for loan defaults at traditional banks
• D. To act as a central bank that sets interest rates for consumer loans

• A. It lends its own capital to every borrower on the platform
• B. It guarantees repayment to all lenders from its own reserves
• C. It facilitates the matching process, underwriting, and loan servicing, while the funds come from investors
• D. It acts only as a savings account where deposits are held until a bank approves a loan

• A. Guaranteed deposit insurance from a national government agency
• B. The risk of borrower default, meaning they may not get their principal and interest back
• C. A fixed return that cannot be affected by borrower behavior
• D. Mandatory repayment priority over all other creditors in every case

• A. Banks never charge interest, while P2P platforms always do
• B. P2P lending removes the traditional intermediary bank by connecting borrowers and investors directly through a platform
• C. P2P loans are only available to large corporations, while bank loans serve individuals
• D. Traditional banks use crowd funding, while P2P platforms use only their own deposits

• A. To determine which lenders are eligible to receive government tax credits
• B. To help lenders assess the likely risk and expected return of each loan before investing
• C. To set a fixed interest rate that all borrowers must accept regardless of their profile
• D. To comply with a legal requirement that all loans must be insured by the platform

• A. To lend its own balance sheet funds directly to borrowers
• B. To match individual lenders with individual borrowers and earn fees for facilitating the transaction ✓
• C. To guarantee all loan repayments out of its own capital
• D. To act as a government-backed deposit insurer for lenders

Why: Traditional P2P platforms act as intermediaries that match lenders and borrowers, typically earning origination and servicing fees rather than taking credit risk on loans themselves.

• A. Marketplace lenders never charge borrowers any fees
• B. Balance sheet lenders use their own capital to fund loans, while marketplace lenders connect outside investors with borrowers ✓
• C. Balance sheet lenders are prohibited from operating online
• D. Marketplace lenders guarantee returns to investors while balance sheet lenders do not

Why: Balance sheet lenders fund loans with their own capital and bear the credit risk, whereas marketplace lenders rely on third-party investors to fund loans and primarily earn platform fees.

• A. The platform operator
• B. The individual lenders who fund the loan ✓
• C. A government deposit insurance scheme
• D. The borrower's employer

Why: On a pure marketplace model, the lenders who fund a loan absorb the losses if the borrower defaults, since the platform does not guarantee repayment.

• A. It is irrelevant because all loans carry identical risk
• B. It helps lenders evaluate borrower creditworthiness and set appropriate interest rates and expected returns ✓
• C. It is used only to determine the platform's tax obligations
• D. It guarantees that no borrower will ever default

Why: Credit grading allows lenders to assess default risk and price loans accordingly, which is central to how P2P markets allocate capital and determine returns.

• A. To eliminate all default risk from the portfolio
• B. To provide liquidity so lenders can exit positions before loan maturity ✓
• C. To avoid having to disclose loan performance data
• D. To allow borrowers to renegotiate their interest rates without consent

Why: Secondary markets give lenders a way to sell loans before maturity, improving liquidity, which is a key concern for investors locked into multi-year loan terms.

• A. To guarantee that every loan will be repaid in full
• B. To estimate the likelihood that a borrower will default and price the loan accordingly
• C. To determine the interest rate the platform charges its own shareholders
• D. To eliminate the need for lenders to diversify their investments

• A. The borrower's favorite color
• B. The borrower's payment history on prior credit obligations
• C. The borrower's social media follower count
• D. The borrower's height and weight

• A. The exact amount of money the borrower will repay
• B. A summary estimate of the borrower's creditworthiness and default risk
• C. The number of years the borrower has lived in their home
• D. The guaranteed return the lender will earn

• A. Lower credit scores are required by law to carry higher rates
• B. Higher perceived default risk requires greater compensation to lenders for taking on that risk
• C. The platform wants to reduce the number of borrowers on its site
• D. Borrowers with low scores always repay their loans early

• A. It measures how much of a borrower's monthly income goes toward debt payments
• B. It measures the borrower's total savings in a bank account
• C. It measures how many loans the lender has funded this year
• D. It measures the borrower's age relative to the loan term

• A. To guarantee a fixed rate of return on every loan
• B. To reduce the impact of any single borrower default on overall returns
• C. To avoid paying platform fees on investments
• D. To ensure loans are repaid before their maturity date

• A. Investing the entire amount in a single high-yield loan
• B. Spreading funds across many small loans to different borrowers
• C. Lending only to borrowers within the same zip code
• D. Choosing loans that all have the same maturity date and purpose

• A. The exact date the borrower will repay the loan
• B. The likelihood of default and the typical interest rate associated with the loan
• C. The borrower's income tax bracket
• D. Whether the loan is secured by physical collateral

• A. Smaller investments are always guaranteed by the platform
• B. It limits the financial damage from any single defaulted loan
• C. Smaller investments avoid all interest rate risk
• D. Many loans pay higher interest than a few large loans

• A. Losing money from a single borrower's late payment
• B. Platform failure or the risk that the lending company itself stops operating
• C. Earning too many small payments each month
• D. Having loans spread across different credit grades

• A. A monthly subscription fee paid by the lender
• B. An origination fee deducted from the loan amount at funding ✓
• C. A percentage of the lender's principal returned at maturity
• D. A fixed annual charge on the lender's account balance

Why: Most P2P platforms charge borrowers an origination fee, typically a percentage of the loan amount, which is deducted when the loan is funded. Lenders usually pay a separate servicing fee on the interest payments they receive.

• A. 10%
• B. 11%
• C. 9% ✓
• D. 1%

Why: The lender earns 10% in interest, and the 1% servicing fee reduces the net return to about 9%. Fees are deducted from payments received, so the net yield is the gross rate minus the fee.

• A. Because interest is only paid once at the end of the loan term
• B. Because defaults, late payments, and fees reduce the cash the lender actually receives ✓
• C. Because the platform keeps all interest for its own operating costs
• D. Because lenders are always paid in platform credits rather than cash

Why: Realized returns are lower than stated rates because some borrowers default or pay late, principal may not be fully recovered, and servicing fees and any other charges reduce net income. Analyzing expected versus realized returns is essential.

• A. Only a single large payment at the end of the term
• B. Equal monthly payments that include both interest and a gradually increasing share of principal ✓
• C. Monthly interest payments only, with the full principal repaid at maturity
• D. Random payments determined by the borrower's discretion

Why: In an amortizing loan, each fixed monthly payment covers the interest accrued for that period, with the remainder reducing principal. Early payments are mostly interest, and later payments are mostly principal, so lenders receive principal back gradually.

• A. Investing the entire portfolio in the single loan with the highest interest rate
• B. Diversifying across many loans with different borrowers and risk grades ✓
• C. Withdrawing all funds as soon as the first payment is missed
• D. Choosing only loans with no stated interest rate

Why: Spreading investments across many borrowers and risk grades limits the effect of any one default on the total portfolio. This is the core principle of diversification in P2P lending.

• A. The Federal Deposit Insurance Corporation (FDIC)
• B. The Securities and Exchange Commission (SEC) ✓
• C. The Federal Reserve Board
• D. The Consumer Financial Protection Bureau (CFPB) only

Why: Many P2P lending notes have been treated as securities under federal law, so platforms typically must register offerings with the SEC or qualify for an exemption. The SEC has taken enforcement actions against platforms that failed to comply with registration requirements.

• A. To guarantee that borrowers will repay their loans
• B. To verify the identity of users and help prevent fraud and money laundering ✓
• C. To set the interest rate charged to each borrower
• D. To determine the credit score of every lender

Why: KYC procedures require platforms to verify who their users are, supporting anti-money laundering (AML) and fraud prevention obligations. It does not guarantee repayment or set interest rates.

• A. A guarantee that loans will be forgiven after five years
• B. Mandatory disclosure of the annual percentage rate (APR) and total finance charges ✓
• C. Unlimited right to cancel any loan at any time without cost
• D. Free credit counseling for every borrower

Why: TILA requires lenders to clearly disclose key credit terms, including the APR and finance charges, so borrowers can compare loan costs. It does not provide loan forgiveness or unlimited free cancellation.

• A. Because deposit insurance only applies to government bonds
• B. Because P2P loan investments are not bank deposits and are not covered by FDIC insurance ✓
• C. Because platforms are required to hold all funds in cash
• D. Because the FDIC only insures loans made to borrowers

Why: Funds invested in P2P loans are not bank deposits, so FDIC insurance does not cover them. Lenders can lose principal if borrowers default, which is why risk disclosure is a key compliance requirement.

• A. Providing clear disclosure of fees and default risks before a loan is funded
• B. Using misleading advertising that hides the risk of borrower default from lenders ✓
• C. Verifying borrower income to assess repayment ability
• D. Giving borrowers a cooling-off period to review loan terms

Why: Misleading advertising that conceals default risk violates consumer protection and fair disclosure principles. The other options describe compliant, protective practices.

• A. The risk that the platform itself goes out of business
• B. The risk that a borrower fails to make scheduled repayments of principal and interest ✓
• C. The risk that interest rates rise after a loan is funded
• D. The risk that the lender withdraws funds before the loan term ends

Why: Default risk is the possibility that a borrower stops making required payments, causing the lender to lose some or all of the expected principal and interest. It is the core credit risk lenders face in P2P lending.

• A. Amortization
• B. Yield to maturity
• C. Recovery ✓
• D. Origination fee

Why: Recovery refers to the money a lender gets back after a default, typically through collection efforts, asset sales, or platform recovery processes. Recovery rates are usually well below 100 percent of the outstanding balance.

• A. Loans automatically become interest-free
• B. Lenders may lose access to loan servicing and collections, potentially delaying or reducing repayments
• C. Borrowers are forgiven all outstanding debt
• D. The government guarantees all lender principal in every case

• A. Investing all funds in a single loan with the highest interest rate
• B. Diversifying investments across many loans and borrowers ✓
• C. Avoiding any loans that carry an interest rate
• D. Withdrawing funds immediately after each repayment is received

Why: Diversification spreads exposure across many borrowers, so a single default has a much smaller effect on overall returns. Concentrating in one loan magnifies losses if that borrower defaults.

• A. They guarantee that a loan will be repaid in full
• B. They give an estimate of borrower credit risk, which helps lenders judge potential default likelihood and expected returns ✓
• C. They determine the lender's tax obligations on interest income
• D. They set the minimum amount a lender must invest

Why: Grades or ratings summarize the platform's assessment of a borrower's creditworthiness. They do not guarantee repayment, but they help lenders compare risk levels and price expected losses into their investment decisions.