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Credit Risk Meets Large Language Models: Building a Risk Indicator from Loan Descriptions in P2P Lending

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arxiv 2401.16458 v3 pith:EVM2ZRQY submitted 2024-01-29 q-fin.RM cs.AIcs.CLcs.LG

classification q-fin.RMcs.AIcs.CLcs.LG
keywords loanriskbertborrowersdescriptionsfeatureslendingmodels
verification ladder T0 review T1 audit T2 compute T3 formal
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Peer-to-peer (P2P) lending connects borrowers and lenders through online platforms but suffers from significant information asymmetry, as lenders often lack sufficient data to assess borrowers' creditworthiness. This paper addresses this challenge by leveraging BERT, a Large Language Model (LLM) known for its ability to capture contextual nuances in text, to generate a risk score based on borrowers' loan descriptions using a dataset from the Lending Club platform. We fine-tune BERT to distinguish between defaulted and non-defaulted loans using the loan descriptions provided by the borrowers. The resulting BERT-generated risk score is then integrated as an additional feature into an XGBoost classifier used at the loan granting stage, where decision-makers have limited information available to guide their decisions. This integration enhances predictive performance, with improvements in balanced accuracy and AUC, highlighting the value of textual features in complementing traditional inputs. Moreover, we find that the incorporation of the BERT score alters how classification models utilize traditional input variables, with these changes varying by loan purpose. These findings suggest that BERT discerns meaningful patterns in loan descriptions, encompassing borrower-specific features, specific purposes, and linguistic characteristics. However, the inherent opacity of LLMs and their potential biases underscore the need for transparent frameworks to ensure regulatory compliance and foster trust. Overall, this study demonstrates how LLM-derived insights interact with traditional features in credit risk modeling, opening new avenues to enhance the explainability and fairness of these models.

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Cited by 4 Pith papers

Reviewed papers in the Pith corpus that reference this work. Sorted by Pith novelty score.

  1. Governing Generative AI Across Financial Institutions: A Framework for Generative AI Risk Control

    q-fin.RM 2026-07 conditional novelty 4.0 of 10

    GAICF maps SR 26-2 model-risk principles into approved-use gates, risk tiers, evidence checks, and output monitoring for generative AI outside the formal model boundary.

  2. Governing Generative AI Across Financial Institutions: A Framework for Generative AI Risk Control

    q-fin.RM 2026-07 unverdicted novelty 3.0 of 10

    A narrative survey organizes generative AI applications in finance into five capability patterns and maps them to business functions; no new results are reported.

  3. When FinTech Meets Privacy: Securing Financial LLMs with Differential Private Fine-Tuning

    cs.CR 2025-09 reject novelty 2.0 of 10

    DPFinLLM is a standard LoRA plus DP-SGD fine-tuning recipe applied to Llama2 and ChatGLM2 for financial sentiment; the experiments are mixed, generally below state-of-the-art, and key details are missing.

  4. Bridging Language Models and Financial Analysis

    q-fin.ST 2025-03 unverdicted novelty 2.0 of 10

    A survey synthesizing recent LLM research and assessing its applicability to financial data analysis.

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