If you are a lender on Prosper you can bid on loans from any state. The story is much different for borrowers. Each state has a different maximum authorized interest rate which can be found on the Prosper state licenses and lending limits chart. This has slowed the growth of peer to peer lending and angered borrowers from rate capped states.
Pennsylvania, for example, is the sixth most populous state with over 12 million people. Based on their state lending laws, Prosper only allows loans to borrowers residing in Pennsylvania at 6% and below. Rather than helping borrowers get a good interest rate the practical effect of this legislation has been to prevent borrowers from obtaining a loan. According to LendingStat's loan breakdown by state, only 21 loans have been made to Pennsylvania borrowers ranking them a distant #42 despite their large population. Almost all of these 21 loans are for the minimum loan amount - $1,000.
Pennsylvania's Pittsburgh Post Gazette interviewed Prosper founder Chris Larsen and published an article about the loan caps and Prosper in today's paper - Peer-to-peer lending sites a growing presence on the Web. Here's the excerpt dealing with Pennsylvania's rate cap:
"For Prosper.com, business has been hampered so far in Pennsylvania by a state statute that sets a maximum interest rate of 6 percent annually on loans of less than $50,000. That makes it hard for Pennsylvania borrowers to attract lenders on the site, Mr. Larsen said.
State and federal laws have carved out exemptions that allow banks and other entities in the state to charge more than 6 percent, but Pennsylvania regulators are still determining whether Prosper.com qualifies.
'We're trying to work with regulators, but it takes time,' Mr. Larsen said.
CircleLending said the 6 percent ceiling 'has not come up as an issue' because lenders know borrowers and are more interested in helping out than making a hefty return.
The Pennsylvania Department of Banking had little to say about the peer-to-peer lending business, other than the agency has noticed significant growth recently.
Officials are examining whether this new type of lending operation should be required to be licensed in the state, spokeswoman Heather Tyler said last week.
For now, she said, 'As always, the banking department urges consumers to use caution and do their homework in selecting a financial service provider.'"
The Pennsylvania loan cap has frustrated many borrowers who have vented in the forums. Borrowers have asked, "Is it possible to get a loan in PA?" Another borrower, Gibsound, started a thread called Pennsylvanians against PA STATE CAP of 6%. He said, "Now don't get me wrong. I love Pennsylvania. However I don't like the state cap of 6%." Jack Talalai who is active on the Prosper forums and works in Pennsylvania's banking industry explained the legislation behind the rate caps is based on the Loan Interest and Protection Law. From the tone of borrowers, it looks like they are tired of being 'protected'.
Update (4/15/2008): Prosper raised the rate cap for all states to 36%
Update (9/2008): Pennsylvania lenders booted from Prosper