Fintech lenders and borrowers screening: Superior abilities or lax practices?

Fintech lenders target borrowers that commercial banks deem too risky. We hypothesize that such borrower selection is either due to superior screening abilities of Fintech lenders, or due to less rigorous screening practices from their part. We find evidence in favor of the "superior screening" hypothesis. Using data on U.S. conforming mortgage loans originated between 2012 and 2022, we show that Fintech mortgage lenders serve borrowers with lower credit scores compared to banks, while experiencing better mortgage performance. This result is particularly strong in the mortgage refinancing market. These findings suggest that Fintech mortgage lenders specialize in providing refinancing credit to ex-ante riskier mortgage applicants, to whom they successfully apply rigorous screening standards.