Tuesday, December 30, 2008

CBS features Lending Club

CBS featured a Lending Club lender and borrower in a short video this week. Iraq war veteran Rob Ramonas borrowed from Lending Club when he was unable to borrow from banks. He plans to become a lender and "pay it forward" when his loan is paid off. Lending Club lender Howard Rubinstein was intrigued by the opportunity to make more than he could through bank CD's and has invested thousands of dollars. He estimates he is making about 10%.

According to CBS news, p2p lending is on the rise and is expected to grow to $6 billion by 2010.

CBS featured p2p lending in March 2008. Unlike the feature in March, there is no mention of Prosper or Zopa which have closed due to regulatory challenges. Lending Club is registered with the SEC and is experiencing increased loan volume.

Wednesday, December 24, 2008

Swap-A-Debt seeks regulatory approval

Swap-A-Debt recently became the latest p2p lending company to seek approval from the SEC. They filed on December 9th - four days after Prosper. On December 22nd they updated their registration.

Here are excerpt from the filing which can be read here:

Business Overview

We are a development stage company in the peer-to-peer (P2P) lending space and we have not generated any revenues since 2005 . Our mission is to establish the most efficient Internet non-institutional lending organization with more services than present privately held competitors. Person-to-person lending or peer-to-peer lending or social lending is, in its broadest sense, the name given to a certain breed of financial transactions (primarily lending and borrowing) which occurs directly between individuals (peers) without the intermediation/participation of a traditional financial institution. The biggest enabling technology for person-to- person lending has been the Internet, where person-to-person lending appears in two primary variations: an “online marketplace” model and a “family and friends” model.

We are an on-line site for borrower’s who want to borrow $1,000 to $25,000 and for lenders who can make educated decisions on credit scores, intended use etc., to receive a higher rate of interest than available at traditional financial institutions. This is all facilitated with an Internet website and a highly efficient back office system to completely automate a process that has become ever more cumbersome at brick and mortar banks. Our fully automated Internet website which utilizes16 high level programmers is ninety five percent complete (for further details please refer to page 1 “Our Corporate Information” section). Because of the high automation of its website the personnel requirements for the company are relatively modest. Swap-a-debt will embark on a major marketing campaign to expand its client base. It is in discussions with major marketing companies to execute this program.

Benefits to Borrowers

We created our peer-to-peer lending community to specifically address the needs of small loan borrowers with few alternatives in the current financial market place. Several key advantages to borrowers participating in the company’s online lending program include the following:
  • Access to needed funds in the small loan range of $1,000 to $25,000
  • The ability to pay a comparatively favorable interest rate, typically ranging from an average of 10% to 16+%, relative to the higher rates often charged by alternative sources such as 25+% for cash advances, credit card changes and payday advances, among others
  • The ability to independently source funding from a anonymous third party lender, rather than face the potentially awkward experience of having to approach family and friends for money
  • The convenience of an online “banking-like” experience, whereby the borrower can apply for a loan online and monitor the results of their application and “lender hits” anytime, anywhere online.

Benefits to Lenders

Likewise, we believe our lending program offers several advantages and incentives for lenders to participate in our peer-to-peer community as below.
  • Compared to the estimated return typically earned on cash deposits, which can range from 2.0% and below, we offer lenders the chance to participate in an investment opportunity with average returns as high as 10% to 16+% on loans made
  • As part of the features of the company’s online lending program, lenders are able to diversify their investments in a portfolio of loans by electing to disperse their funds amongst one or several different borrowers. Additionally, a single lender may choose to provide just a fraction of a borrower’s requested amount, with the remainder coming from other participating lenders in the online community. By choosing to practice lending diversification, lenders should better be able to insulate their returns from the default of any one/few borrowers while still earnings superior returns
  • The convenience of an online “investing” experience, whereby the lender can create his/her own portfolio of borrower loans


Competitors are listed as follows:

Prosper was the first on-line peer-to-peer matchmaker which started in February 2006 and has over 600,000 users, over 10,000 deals and loans over $200 million. They were initially funded and founded by Chris Larson who founded E-Loan before Prosper.

In April 2007, Ebay moved into peer-to-peer lending space with the purchase of pre-launch, San Francisco based MicroPlace.

Circle lending started in October 2007 and sold a majority stake in the company to Richard Branson’s Virgin USA, re-branding itself as Virgin money. The site manages more than $200 million in loans between friends and family.

The Online Banking Report predicts that within five years, the total market for P2P lending in the U.S. could surpass 1,000,000 loans annually.

Resources Requirements

The resources and necessary know-how to create a successful online community for the purpose of conducting financial transactions, including the borrowing and lending of funds, are extensive. In addition to technical programming skills, the builder must have a thorough understanding of the complex laws and requirements of United States, on a state by state basis, that regulate the online banking industry and dictate its permissible transactions. Effectively, all code must be written to comply with virtually hundreds of laws at every stage and consideration of the transaction process, including the requirements of the Securities and Exchange Commission, the Department of Homeland Security and federal and state laws, among others. Failure to identify and comply with all of these laws as part of peer-to-peer provider’s business plan can delay, halt or even close down an operator’s efforts.

We have invested many thousands of man-hours, and the expertise equivalent of over one hundred years in the programming industry via 16 high level programmers to complete our fully automated Internet website. These efforts were undertaken to ensure all code comprising our platform is logically written to comply with the laws of United States. Furthermore, while we believe our website provides an easy-to-use platform for users, the actual technical framework behind our site is extremely sophisticated. We believe this level of complexity limits the ability of new players to easily enter the market.

Otherwise, we will utilize the proceeds of the investment to bring on senior management to the company. Because of the high automation of our website the personnel requirements for our company are relatively modest. We will also embark on a major marketing campaign to expand our client base. It is in discussions with major marketing companies to execute this program.

Potential Future Business

We are the only online peer-to-peer lending platform for the underserved, small loan market of sub-$25,000 that offers an array of additional credit and financing services to potential borrowers. At present, we do not use any of it own funds for making loans to would-be borrowers, rather the entire amount of funds invested in loans is sourced from other lender participants in the company’s online platform. Going forward, we may choose to pursue a “hybrid model” whereby loans to individual borrowers are sourced in part from the peer-to-peer lending community and in part directly from our own corporate funds.

We believe this hybrid model would be unique to the industry as, at present, the industry of online lending is comprised of players participating either solely as a banking organizations with the deployment of their own funds/customer deposits, or as a peer-to-peer operation where no “house” funds are involved.

Additionally, going forward, we envision extending our lending services small businesses seeking up to approximately $10 million in funding.


As of December 8 , 2008, we have two full-time employees, Marco Garibaldi and Edward DeFeudis. Marco Garibaldi is the CEO and Co-Founder, and Edward DeFeudis is the President and Co-Founder. Mr. Garibaldi and Mr. DeFeudis each spend in excess of 50 hours per working on behalf of the company. As we launch and begin to generate revenue, we will look to raise capital and hire 9 additional staff members over the next 12 months.

Read the rest of the filing here. In October Lending Club became the first p2p lending company to receive SEC approval. Prosper filed with the SEC on December 5th.

Last minute gift certificate idea and $25 for you

Merry Christmas from Prosper Lending Review and thanks for a great year! As thanks, I want to give away a $25 gift certificate to one of our readers. Read to the bottom of this post for more details. (This post has nothing to do with p2p lending, by the way.)

Like many, I often procrastinate my Christmas shopping until the last minute. If you are shopping today, skip the crowds and order a gift certificate online. Let the recipient pick what they want even if you don't know what it is.

I just purchased several gift certificates for friends and family from Yard & Pool Company. This is an online store that rocks. They have real customer service which is, quite frankly, usually lacking from online stores. I'm not getting paid to say this. I like the store and want to help promote their business. They sell quite a variety of stuff. Here's a quick overview of what you can find there:

Grilling and smoking - You can find all kinds of grills, smokers, turkey fryers, BBQ sauces and pretty much anything else you might need for grilling. Their hottest selling item is the Bradley Smoker and they offer 10% off a Bradley Smoker starter kit.
Swimming pools - For most of the U.S. it is out of season, but they have a great selection and great prices on above-ground pools and everything else you might need for your pool like pool lights, ladders and pool toys.
Spas and hot tubs - Stuff like spa chemicals, toys and accessories, fragrances and more.
Backyard and patio - My favorite category includes things like patio furniture, Gorilla playsets, patio heaters (I wish I had one of those now!), fireplaces and more.
Game, bar and rec room - Billiard tables, dart boards, ping pong tables, wall decor and everything else to deck out your basement.
Finally, you can also find Christmas stuff and some sweet end of year clearance deals.

As you guessed by now, I'm a big fan of Yard & Pool Company. And I'm a big fan of my readers. So, I am giving away a $25 gift certificate to one of you. Just leave a comment and link to the item on Yard & Pool that you would buy if I gave you a gift certificate. I have to be able to send you the gift certificate, so leave your email or send it to me at prosperlending@gmail.com.

As an extra Christmas incentive to purchase at Yard & Pool, they are also running a special where for every $25 gift certificate purchase you get $5 towards a future purchase.

So, thanks Yard & Pool for allowing me to procrastinate my Christmas shopping and get my family and friends what they want even if I don't know what it is.

Have a great Christmas and I promise I'll be back to writing about p2p lending in moments.

Tuesday, December 23, 2008

Pertuity Direct to launch 'immediately after the New Year'

Pertuity Direct is preparing to launch "immediately after the New Year" according to an email they just sent to interested members. They originally planned to launch a couple months ago at FINOVATE but delayed to ensure they met regulatory requirements.

Here is the full text of the email:

As we wrap up 2008, we thought it would be a good time to check in with you and share the great progress we have made as a company.

If you have been keeping tabs on the space, you know that the social lending industry has been pretty interesting over the last two to three months. The guidance that regulators have given with regard to the segment, combined with the fact that consumer loans are still hard to come by, fits perfectly with what we are bringing to market. There is a real need for alternative sources of capital for consumers, as well as new and better investing options. Social lending is a great answer to the problem - and Pertuity Direct is poised to bring it to the mass market.

We are in final preparations to launch immediately after the New Year. All of the pieces are finally in place and we are revving up for Day 1.

We're excited about 2009 and are looking forward to reaching out to you very shortly as we open for business. Until then, we wish you all much joy and happiness with friends and family this holiday season.

Monday, December 8, 2008

Lending Club opens to lenders from Virginia

Despite the regulatory troubles of all other p2p lending platforms (and perhaps partly because of it), Lending Club is doing very well. They are open for borrowers from all states and continues to add lending on a state-by-state basis. Today they added Virginia. Here is the latest map showing the states who are eligible to lend on Lending Club.

Friday, December 5, 2008

Prosper files S-1 registration with the SEC

Prosper filed a S-1 Registration Statement with the Securities and Exchange Commission (SEC) today. The document can be read here.

Recent related history
This week: Prosper fined $1 million; class action lawsuit prepared
Last week: SEC files cease and desist against Prosper; Loanio halts operations
Oct 15: Prosper halts operations; enters quiet period
Oct 14: Lending Club emerges from quiet period
Oct 9: Zopa closes
Oct 1: Loanio opens
April 2008: Lending Club enters quiet period

Tuesday, December 2, 2008

Prosper fined $1 million; faces class action lawsuit from lenders

Prosper has agreed to pay state regulators $1 million for selling unregistered securities. In October Prosper stopped making loans and last week the SEC filed cease and desist proceedings against the company. According to a press release from North American Securities Administrators Association (NASAA):

"Under terms of the settlement, San Francisco-based Prosper agreed not to offer or sell any securities in any jurisdiction until it is in compliance with that jurisdiction’s securities registration laws. Prosper also agreed to pay a fine totaling $1 million to the states. In consideration of the settlement, the states will terminate their investigation of Prosper’s activities related to the sale of securities before November 24, 2008."

Although Prosper has settled with state regulators, they still face potential legal trouble from lenders. Phillip Kim, an attorney with The Rosen Law Firm posted the following message on Prospers.org:

"We are investigating a potential civil securities class action against Prosper on behalf of any person or entity that has lost money in offering loans using the Prosper platform since Prosper's inception in January 2006. Such persons and entities may be able to recover their losses from their loans because the loans may have resulted from unregistered securities."

Based on the legal quandary of p2p lending, Zopa and Loanio have both closed their doors. Lending Club, on the other hand, has registered with the SEC and has seen increased business due to the failure of other platforms and the current economic difficulties.

Wednesday, November 26, 2008

Prosper in violation of SEC; Loanio to halt operations

In case you haven't been paying attention, over the past few months several events have reshaped the P2P lending marketplace.
If you thought things would quiet down, you were wrong. Here's the latest...

The SEC has filed cease and desist proceedings against Prosper. According to the filing, "The loan notes issued by Prosper pursuant to this platform are securities and Prosper, from approximately January 2006 through October 14, 2008, violated Sections 5(a) and (c) of the Securities Act..." Fred93 wrote some very insightful commentary about the dilemma last week. There is also an ongoing discussion on Prospers.org.

Now, to top things off, it appears Loanio will also halt operations. Wiseclerk has a statement from Loanio's CEO, "effective immediately Loanio will no longer be accepting registration from lenders or borrowers." There is no announcement on Loanio's website yet.

Despite the troubles of Prosper and Loanio (and perhaps partly because of it), Lending Club is doing very well. They are open for borrowers from all states and continue to add lending on a state-by-state basis. Here is the latest map, from Lending Club's blog, showing the states who are eligible to lend on Lending Club. The most recent addition is California.

P2P Lending on VOA News

Michael Sullivan from VOA News discusses P2P Lending on his radio program.

Much of the program is about Lending Club which, right now, is the leading P2P lending site. There is a discussion about how the current financial crisis is actually good for Lending Club. Prosper, Virgin Money, Zopa and Kiva are also all mentioned.

According to the radio program, Zopa closed due to "difficult lending conditions." Although it is easy to blame the credit crunch in this environment, the much more likely culprit is SEC regulations. Loanio and Prosper are also in a sticky situation right now due to SEC regs.

Friday, November 7, 2008

How might an Obama/Biden administration change p2p lending?

With the historic election of Senator Obama and Biden this week, the focus is now on what changes they will bring to the country. There are many proposed changes that might have an impact on peer to peer lending. According to change.gov, a site set up by the Obama-Biden Transition Project, "In the Illinois State Senate, Obama called attention to predatory lending issues. Obama sponsored legislation to combat predatory payday loans, and he also was credited with lobbying the state to more closely regulate some of the most egregious predatory lending practices."

While I do not believe Obama has ever specifically mentioned p2p lending, there are several of his economic proposals that are likely to impact the industry. Some of these proposals may influence the demand for loans or have other second and third order effects. Other changes may have a regulatory influence on the industry. Here are some of the specific proposals from change.gov:

Address Predatory Credit Card Practices

Obama and Biden will establish a five-star rating system so that every consumer knows the risk involved in every credit card. They also will establish a Credit Card Bill of Rights to stop credit card companies from exploiting consumers with unfair practices.

  • Create a Credit Card Rating System to Improve Disclosure: Obama and Biden will create a credit card rating system, modeled on five-star systems used for other consumer products, to provide consumers an easily identifiable ranking of credit cards, based on the card's features. Credit card companies will be required to display the rating on all application and contract materials, enabling consumers to quickly understand all of the major provisions of a credit card without having to rely exclusively on fine print in lengthy documents.
  • Establish a Credit Card Bill of Rights to Protect Consumers: Obama and Biden will create a Credit Card Bill of Rights to protect consumers. The Obama-Biden plan will:
    • Ban Unilateral Changes
    • Apply Interest Rate Increases Only to Future Debt
    • Prohibit Interest on Fees
    • Prohibit "Universal Defaults"
    • Require Prompt and Fair Crediting of Cardholder Payments

Reform Bankruptcy Laws

Obama and Biden will reform our bankruptcy laws to protect working people, ban executive bonuses for bankrupt companies, and require disclosure of all pension investments.

  • Cap Outlandish Interest Rates on Payday Loans and Improve Disclosure: Obama and Biden will extend a 36 percent interest cap to all Americans. They will require lenders to provide clear and simplified information about loan fees, payments and penalties, which is why they'll require lenders to provide this information during the application process.
  • Encourage Responsible Lending Institutions to Make Small Consumer Loans: Obama and Biden will encourage banks, credit unions and Community Development Financial Institutions to provide affordable short-term and small-dollar loans and to drive unscrupulous lenders out of business.
  • Reform Bankruptcy Laws to Protect Families Facing a Medical Crisis: Obama and Biden will create an exemption in bankruptcy law for individuals who can prove they filed for bankruptcy because of medical expenses. This exemption will create a process that forgives the debt and lets the individuals get back on their feet.

Higher Education

  • Create the American Opportunity Tax Credit: Obama and Biden will make college affordable for all Americans by creating a new American Opportunity Tax Credit. This universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, and will cover two-thirds the cost of tuition at the average public college or university and make community college tuition completely free for most students. Recipients of the credit will be required to conduct 100 hours of community service.
  • Simplify the Application Process for Financial Aid: Obama and Biden will streamline the financial aid process by eliminating the current federal financial aid application and enabling families to apply simply by checking a box on their tax form, authorizing their tax information to be used, and eliminating the need for a separate application.
Will any of these proposals, if enacted, have an impact on the p2p lending marketplace? What do you think?

Friday, October 31, 2008

Lending Club adds Washington and New Hampshire

Lending Club opened for lenders from 15 states and borrowers from all states a couple weeks ago. Since then they have added six more states. The two most recent additions are Washington State and New Hampshire. Rob Garcia, Director of Product Strategy, told me one of the top priorities for Lending Club is to add states as soon as they get clearance from state authorities.

Tuesday, October 28, 2008

Lending Club issues $1M in loans in 10 days

Lending Club's CEO Renaud Laplanche was interviewed today on ABC's Money Matters.

Laplanche said Lending Club has issued over $1,000,000 in loans over the last ten days. He said the number of borrowers and lenders has gone up dramatically due to recent events. The number of borrowers has increased due to tighter credit. Lenders have also increased due to a stock market which is not performing as well as normal and investors who are looking for alternative investment opportunities.

Although Laplanche did not mention Prosper, he tried to differentiate Lending Club from other peer to peer lending companies that have higher default rates by emphasizing their exclusive focus on prime borrowers. He said Lending Club has been very careful on protecting lenders from sub-prime borrowers and risk. According to Laplanche, the default rate since May 2007 has been “less than 2%.”

Lending Club was also featured on ABC News back in April.

Wednesday, October 22, 2008

Lending Club opens referral program while Prosper shuts their program down

For a little more than a year, Prosper managed a referral program which rewarded new lenders with a $25 bonus and the referring party with bonuses as high as $50. Over time the program experienced many changes but remained a valuable means to drive new business to Prosper. Last week Prosper entered a quiet period and yesterday they sent the following message to members of their affiliate program:

We are writing to inform you that the Prosper Referral Program has been shut down and is no longer in effect. Our lender activity is limited. Click here to learn more.

As a result we request you take down any reference to Prosper immediately.

Thank you for your immediate attention in this matter.

It is uncertain what "any reference to Propser" includes. Presumable it only refers to advertisements. While we have typically used referral links when linking to Prosper we have not served Prosper ads for quite some time.

Websites which rely on referral income can now turn to Lending Club. Lending Club started a referral program with Commission Junction earlier this month. Here are the details of the program:

Description: Lending Club is a social lending network where members lend and borrow money from each other at better rates, bypassing the banks.

We have already issued more than $20,000,000 in loans at better rates than banks' and we are looking to spread the word of this great alternative.

We will reward publishers for every user they refer that fill out the loan application form, independent of the loan issuing or not.

Lending Club accepts only US-based credit worthy borrowers with 640+ FICO score and no current delinquencies.

Here are some answers you may be looking for before you advertise for us:

What will you pay for?
We will reward publishers for sending us qualified traffic:
$35 for first 10 applications/month
$40 for each additional loan application

What is your conversion rate?
Our current conversion rates are very high (upwards of 60%) if the user is looking for a loan and has good credit.

Do you have a dedicated affiliate manager?
Yes. We have asked CJ to manage the program initially, and in addition, we have a dedicated SEM resource on board.

What is your average order amount?
Typical order amount is between $80-$150(fees charged once a loan is issued). We don't charge a fee for application, and about 80% of the applications actually become loans.

Is your website attractive and easy to navigate?
Very much. We won the Webby award 2008 as best banking and payments site as well as a 2008 WebAward for Outstanding financial services site.

How does your commission structure compare with other advertisers in your category?
We feel we are very competitive and in most cases, we pay higher than other advertisers.

If a publisher consistently performs, will you increase their commission?
YES. We are willing to discuss better pay-offs based on performance, quality of borrowers and volume.

Based on my own experience with various referral programs I'm optimistic towards Lending Club's new referral program. With Prosper, hundreds of new members have joined Prosper after clicking on links from this site but very few have become borrowers or lenders. Prosper did not pay a referral bonus until the borrower made their first payment so, even if the borrower converted, it was still several months until a payment occurred.

Lending Club pays immediately after a person fills out a loan application, so their referral program is much more likely to result in referral bonuses and much more likely to result in payments. Hopefully Lending Club will expand their program to lenders as well as borrowers in the near future.

Here is an example of one of Lending Club's new ads available through Commission Junction. Click through for the improved landing page.

Tuesday, October 21, 2008

Media touts p2p lending - ignores upheaval

The Associated Press published an article yesterday - Peer-to-peer lending — Weighing benefits and risks. Although the article was published on October 20th, it seems like it was written at least a week ago. There is no mention of Prosper's lending halt. In fact, despite the quiet period, the author quotes Prosper's CEO. Here is an excerpt:

Getting loans through peer-to-peer lending isn’t as easy as you may think. These days, many have just as much trouble getting loans on Prosper.com as they might at a bank.

That’s because the lending site is getting a new wave of people with good credit who were turned away by banks, said Chris Larsen, the company’s CEO.

“So lenders are pickier about who they fund,” he said.

Only 5 percent of people with credit grades that fall in the bottom three brackets (out of seven) now get loans on the site, with about 40 percent of loans going to people with scores in the two highest brackets.

Friday, October 17, 2008

Lending Club rapidly adding more states

On Tuesday, Lending Club completed their registration with the SEC and opened for lenders from 15 states. Already, in less than a week, they have added four more states - Utah, Wyoming, Hawaii, and Nevada. We expect Lending Club to continue to rapidly add states as they work with state regulators.

Lending Club's re-emergence could not have been timed better. With Zopa and Prosper now closed, Lending Club now only has to compete with upstart Loanio for the p2p lending market.

Maneo becomes first p2p lending platform in Japan

The past few days have been exciting for peer to peer lending - Loanio opened, Zopa closed, Lending Club emerged from their quiet period and Prosper halted lending. There is also big news overseas - Maneo launched the first peer to peer lending platform in Japan.

Over a year ago, Prosper announced plans to expand to Japan. There has been no news from Prosper since. Now that Prosper has entered a quiet period and is distracted with SEC regulations in the U.S., it is unlikely we will hear anything more about Prosper's planned expansion to Japan for some time.

Maneo is actually a play on the English words money and new. Maneo's CEO Tadatoshi Senoo said the platform has been in development since August 2006. Like the United States, Japan has extensive regulatory hurdles which had to be overcome.

Here are details about Maneo from their press release:

How to use maneo's social lending service

After initially registering as a member with maneo, borrowers and lenders can utilize maneo's social networking service. Registered members can easily and effectively communicate with other members utilizing "mane blog," "maneo message," and "mane tomo."

Creating an auction

People who want to borrow on maneo create loan listings explaining how much they desire, why they want to borrow and the maximum interest rate they are willing to pay lenders. Potential lenders select the loan listings they are interested in and bid on these loans. maneo connects borrowers with lenders through an auction process in which the lender willing to provide the lowest interest rate "wins" the borrower's loan.

Member requirements

Members must be between 20-65 years old and reside in Japan.

Borrower requirements

Borrowers must be between 20-60 years old and have annual income of at least 3 million yen. Borrowers must also successfully pass maneo's credit check and submit the following documentation: proof of identity and annual income.

Lender requirements

Lenders must be between 20-65 years old. Lenders must also successfully pass maneo's review process and submit proof of identity.

Wednesday, October 15, 2008

Prosper enters quiet period; halts lending

This has not only been a crazy week in the stock market - it's been a crazy week for p2p lending as well. Over the past couple of days Loanio has opened, Zopa has closed and Lending Club has emerged from their quiet period and announced a secondary market. Now, to top it off, Prosper is entering a quiet period to register with the SEC. Lending Club's registration took about six months.

This is the message Prosper has sent to members:

Prosper has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future.

The registration filing is a necessary step toward making the secondary lending market available to the community. This is something many of you have been asking for, and we believe the liquidity of a secondary market will make Prosper even more vibrant.

Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. If you're an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you'll be able to track and monitor your loans; and you'll be able to withdraw funds from your Prosper account.

If you're a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process. If you're a borrower seeking a loan, you will still be able to create a new loan listing, which we will endeavor to fulfill through alternative sources.

A successful registration can take several months, but we assure you we will do our best to move forward as quickly as possible. Until this process is complete, we're required to be in a quiet period and will be unable to respond to press, blogger or other inquiries about Prosper or the registration filing until it becomes effective.

We apologize for any inconvenience this may cause, and want to thank you in advance for your understanding and support.

Tuesday, October 14, 2008

Lending Club and Loanio present at FINVOATE 2008

Two dozen companies including Lending Club and Loanio presented at FINOVATE 2008 in New York City today. Netbanker reported on the various presentations throughout the day.

Of course, the big news is Lending Club re-opened to lenders today. They also opened the first secondary market for p2p loans. According to Netbanker's report of the presentation, Lending Club has "been experiencing a 2% default rate and have been approving 14% of applications received."

As for Loanio, Netbanker's Jim Bruene reported, "Solomon walked the audience through the Loanio loan application process emphasizing the option to have a co-borrower, a first for a U.S. P2P lender, and the optional Platinum loan listing, which includes a host of verifications to give lenders more assurance the borrower is being truthful with their application."

Our review of Loanio is here. Loanio was a last-minute addition to FINOVATE after Pertuity Direct delayed their launch to ensure they meet regulatory requirements.

Lending Club opens for investors from 15 states; allows lenders to sell loans

Six months ago Lending Club halted lending operations in order to register with the SEC. They have now completed the registration and have opened their doors to lenders again from selected states. If you are from Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Louisiana, Minnesota, Mississippi, Montana, New York, Rhode Island, South Dakota, West Virginia, or Wisconsin you can lend on the new platform.

In addition, Lending Club has a trading platform where lenders can now sell loans to other investors. This is the first p2p lending company to offer liquidity.

According to the official announcement this registration will bring the following changes:
  • Under the registered offering, Lending Club lenders will now invest in notes that correspond to portions of loans made to borrower members. The notes have stated interest rates ranging from 6.69 percent to 18.63 percent, after a 1 percent service charge is applied.
  • By partnering with FOLIOfn Investments, Inc., a registered broker dealer, Lending Club becomes the first social lending network where lenders have the option of a trading platform. On the trading platform, lenders who become customers of FOLIOfn will be able to put notes up for sale in the event they need liquidity before the completed term of a note.

Friday, October 10, 2008

Recession's likely impact on p2p lending

"In the financial news you can find a story almost every day about the weakness in real estate markets, rising foreclosure rates, and increases in the number of bankruptcy filings. Some economists worry about the effects spreading across the broader economy and triggering a recession. The bearish outlook suggests that lenders will tighten up their borrowing criteria, consumer spending will decrease, and unemployment will start to increase." - Matt here on Prosper Lending Review, June 28, 2007

The stock market just had its worst week ever based largely on fears we are entering a recession. Last year Matt wrote an article about the likely impact of a recession on P2P lending. His points are all still valid. It's worth another look now.

Thursday, October 9, 2008

CNN recommends P2P lending

I was just watching the evening news on CNN. Anderson Cooper was discussing the market with a few guests. The stock market is down nearly 40% on the year. He read a question from a viewer who asked if there was anything for someone to make money in a market like this.

The CNN "expert" suggested two things. First, if you have good credit and some cash it may be a good time to look into buying foreclosures. Second, look at p2p lending. People have few choices for loans right now and are looking to their peers. If you are in a position you can loan to others and earn a good return, according to the analysts.

This echos sentiment from a CNN article last week. With the market down, investors are looking to p2p lending for a better return. With traditional sources of credit disappearing, people are turning to p2p lending.

Back in March, Lending Club CEO Renaud Laplanche told The Kansas City Star the peer-to-peer lending industry is being aided by something of a perfect storm. "On the borrower side, banks are tightening the money supply," he said. "On the lender side, the stock market isn't performing well." If it was true in March, it is even more true now.

Zopa closes shop in the US

I knew something was fishy at Zopa when last week they denied my loan request despite near-perfect credit. Was it a software glitch? Had they tightened lending standards without letting customers know?

After posting the rant about my loan denial, I received an email from customer service on Thursday night which indicated my loan may have been denied due to a software glitch. They said they would check on things and get back to me by Friday morning. By Tuesday I had not heard anything so I followed up with another email. I received this response:

"I'm told it should work now. When you have a chance, please go back to www.zopa.com and click "Borrow" (just like you did the first time). Just to be safe, we removed your information from the Zopa system. Therefore, you will start over as a brand new member."

Now, just a day later Zopa is shutting down loan operations. Here is part of the official announcement:

"You probably know that Zopa’s US operation has a very different model to that in the UK and Italy in that it works in partnership with financial institutions (the credit unions) rather than being a pure peer to peer marketplace as it is here and in Italy.

So while our model is doing very well in current market conditions, the US has been adversely affected as the credit unions have pretty much stopped lending which rather limits the work that our US friends can do. This just couldn’t have been predicted when we launched int he US and is no way the fault of our partners. For us, a real shame is that we weren’t able to launch the original model over there for regulatory reasons.

So, sadly, our US colleagues have decided to withdraw from the US marketplace. This decision will have no impact on Zopa’s other activities in the UK, Italy and Asia.

Zopa’s UK operation has experienced significant volume increases in 2008 with huge growth in new members and increasing lender returns, while continuing to maintain excellent credit quality – currently less than 0.5% of loans are affected by any kind of late payment issue, with actual losses below 0.04%.

Zopa Italy has also achieved the highest growth of any European peer-to-peer operation since its launch in January, and has recently launched the first secondary market for any peer-to-peer operation.

Zopa’s US customers’ deposit accounts continue to be insured by the NCUA up to $250,000, and servicing of those accounts as well as the loans will be assumed by the credit unions within 90 days."

Zopa is closing shop less than a year after they opened their doors.

Update: Zopa's CFO posted the following message in their official forum:

"We obviously need to respond to this. The email from Affinity Plus is partially correct in that we are transferring our customers relationships to the credit union they either borrowed from or bought a CD from (invested in). We are NOT shutting the website today. As most of you know, Zopa's US operation has a very different model to that in the UK and Italy in that it works in partnership with financial institutions (the credit unions) rather than being a pure peer to peer marketplace as it is here and in Italy. So while our model is doing very well in current market conditions, the US has been adversely affected in a way that couldn't have been predicted when we launched and is no way the fault of our partners. For me, a real shame is that we weren't able to launch the original model over there for regulatory reasons, esp given what a great job the regulators have turned out to have been doing there over the last few years, but that is another story....

The decision has not been taken lightly, and has obviously been difficult for our US colleagues, but due to the current credit crisis we have decided to withdraw from the US marketplace. This decision will have no impact on Zopa's other activities in the UK, Italy and Asia. Zopa’s UK operation has experienced significant volume increases in 2008 with huge growth in new members and increasing lender returns, while continuing to maintain excellent credit quality – currently less than 0.5% of loans are affected by any kind of late payment issue, with actual losses below 0.04%. Zopa Italy has achieved the highest growth of any European peer-to-peer operation since its launch in January, and has recently launched the first secondary market for any peer-to-peer operation."

Tip: Wiseclerk, Prospers.org

Thursday, October 2, 2008

Need a p2p loan? Avoid Zopa

I have never considered the possibility I might be denied for a loan - yet it happened today. Only once in my life have I ever missed or been late on a payment (about four years ago I moved and the utility company didn't forward my last bill). I pay off my entire credit card balance every month. I have no debt except a home mortgage. My FICO score is over 700 and Prosper gives me a shiny AA rating.

On this blog I've largely neglected Zopa while writing much more about Prosper, Lending Club, Fynanz and Loanio. So, just for kicks I decided to go through the application process and write about obtaining a loan through Zopa. Imagine my suprise when I got this message.

"For Zopa to work, we can only arrange loans to folks with pretty good credit - a minimum FICO of 640, among other things."

What other things could they be talking about? According to the FAQ you need:
  • a minimum credit score (FICO) of 640
  • income of $2,000 per month
  • and a few years of credit history

Well, I have more than $2,000 per month income and I've got more than a decade of credit history. What else could they want? I found some more requirements on this splash page:

  • Miniumum FICO score of 640
  • Minimum of 3 years of credit history with at least 5 accounts
  • No recent bankruptcies or serious delinquencies
  • Stable gross income of at least $2,000/month
  • Borrowers utilizing less than 60% of the credit available to them are more likely to be approved for a Zopa loan and at a lower interest rate
  • A debt service ratio/debt to income of less than 50% of gross monthly income

Hmmm...no problems with any of these requirements. I sent a note to customer service requesting specific information about why I was declined. I received a vague response, "Since you do have a score above 640 it looks like the application was declined for one of the other reasons." I followed up with a phone call and was told the borrower requirements have changed within the last 30 days.

An email to their media contact was returned undelieverable.

Fearing identity theft or something worse, I logged in and pulled up my credit report. Only one surprise. There is a new item on my credit report - a credit inquiry today for a loan. The only inquiry on my credit report at all. Unlike Prosper and Lending Club, Zopa pulls a "hard" request when you inquire about a loan. I should have read all of the FAQ throughly before requesting a loan. Here's what Zopa has to say about their "hard" inquiry:

"We think it's best if you assume that there will be an impact to your credit score. That means you should only get a quote if you really would be interested in a Zopa Loan."

I would add - you should only request a quote if you have perfect credit and don't mind a hard inquiry on your credit score even if you decide not to obtain a loan through Zopa. Try one of the other p2p lending platforms (like Lending Club) which do not pull a hard inquiry.

Loanio: Day 1

Yesterday Loanio launched and there are already six loan requests. On the Loanio blog, CEO Michael Solomon says it has been a wonderful week for him despite the uncertain financial markets - his son turned one, he won $1,000 in the New York State lottery and finally launched Loanio. Loanio has released the following press release about their launch:

Loanio.com unveils its peer to peer lending platform today and offers subprime, thin and no credit borrowers, the opportunity to get loans without exposing higher risks to its lenders

NEW YORK, Oct. 1 /PRNewswire/ -- Loanio, Inc. launched its p2p lending website (https://www.loanio.com) today, addressing the needs of an underserved market--those with poor or no credit profile histories. Prior to the launch, borrowers with poor or no credit scores have been turned away from, or have had little luck, with other p2p lending platforms. Loanio is looking to change this.

Borrowers with poor or no credit scores will be permitted to participate on the p2p lending platform by using a Co-Borrower or guarantors. According to CEO and Founder Michael Solomon, "only around 10% of borrowers on p2p sites wind up getting a loan. Many of them have less than stellar credit profiles. With options for these borrowers drying up elsewhere, we believe this feature and others on the website will fill a sorely needed void in the p2p lending arena."

To provide lenders on the platform with more reliable data, the company also introduced "Platinum Verification Services." This service is optional and available to borrowers at the time they create their loan request. A Platinum loan will indicate to lenders that Loanio has verified certain, otherwise "self-reported", financial profiles of borrowers such as last year's filed tax returns, employment and income, and more. "We want to provide as much data to our lenders as possible and the verification of these items allow borrowers to tell lenders they are serious about this process. Lenders, in turn, will have the benefit of not having to wonder if the borrower may have given their income data a 'little extra padding.'"

While the Co-Borrower option is mandatory for those with bad or no credit, both the Co-Borrower and Platinum Verification features are available to all users as an option. Solomon says, "The idea is that we want to provide all borrowers with as many possible tools to shine and present appealing loan requests to the lenders." With these features available to all users, even a fair credit borrower may be seen as a better risk if they have a Co-Borrower with an excellent credit record attached to their loan. The combination will also help the borrower get even lower rates. "If you saw two loan requests for the same money and rates, but one had an excellent rated Co-Borrower attached to it and went through the Platinum Verification process, which one would you bet on? I think the choice would be clear" Solomon continues.

Wednesday, October 1, 2008

Loanio launches

I jumped the gun last week but it's for real this time. After nearly a year of anticipation, Loanio has finally opened their doors. You can sign up as a lender, borrower or co-borrower. Last month we got a sneak peak and reviewed Loanio. Now you can check it out at the official site.

There is currently one borrower listing. A borrower from Pennsylvania hopes to consolidate her credit card debt.

Thursday, September 25, 2008

Loanio to launch soon

Update (12:20PM EST): I've changed the title of this post from "Loanio launches" to "Loanio to launch soon." It appears I may have jumped the gun with the announcement. Myself and others were able to access the site for a brief period this morning. There are some technical changes going on with the domain as Loanio readies itself for an imminent launch. Visit Loanio to check the latest status or review the screenshots we posted two weeks ago.


Original post: After nearly a year of anticipation, Loanio has finally opened their doors. There are no borrower listings yet but you can sign up as a lender, borrower or co-borrower. Two weeks ago we got a sneak peak and reviewed Loanio. Now you can check it out here.

Wednesday, September 17, 2008

PA lenders angry over ban

Due to state regulations, Prosper banned lenders from Pennsylvania. This caused an immediate and angry response from Prosper lenders. One started a petition and blog - Pennsylvanians for Prosper Lending.

Many PA lenders left angry comments on the official Prosper blog. Here's a sample:

"I want to express my outrage. I received an email this morning stating that you are no longer allowing bids from registered lenders in PA, and you are also not allowing new lenders from my state as well. The policy in general doesn’t make any sense to me, but more importantly I think all PA lenders should’ve been notified that this change was coming (instead of it becoming effective immediately). I feel like Prosper has slapped me upside the head in the way this situation has been handled. I have previously been very content with the way this site has been run and am more than disappointed in how this situation has been handled." - wyominggirl7

"If Prosper has had ongoing discussions with regulators in Pennsylvania, why didn’t Prosper contact PA lenders sooner? Not only is this announcement a surprise, it’s a wasted opportunity: PA lenders could have contacted their state senators and representatives, not to mention Governor Rendell’s office, to apply some pressure." - DonQ

"I contacted my state rep over this lending issue for PA residents. I imagine that the banks do not like this peer to peer lending and so they lobbied to shut us down. Yes I know, heavy handed government tactics at work again." TeddK

"I suggest you all contact your state representatives and senators as well as the governor. I already have my state rep interested in this issue. I need more information to give him about the what the regulations are and what officials and organizations are involved. I wish prosper had told use sooner so we could have pressured law makers." - Jon P

"Pennsylvania get more ridiculous all the time. I want to continue lending! I have signed the petition mentioned above and will be contacting my legislators right away!" - Mike S

"I just can’t believe this. With all my other investments tanking, you take away the one that I am actually making a good return on. Its crap like this that pushes people over the edge." - Jim C

In response, Prosper has published contact information for PA officials who may be able to influence the decision. They indicate they are primarily in discussions with the Pennsylvania Securities Commission.

Pennsylvania Securities Commission

Pennsylvania Governor Edward G. Rendell’s Office

Pennsylvania Open for Business

Pennsylvania House of Representatives

Pennsylvania State Senate

Market in turmoil

You have seen the news...

Today: Feds rescue AIG with $85 billion bailout

And from the past few days:

"Stocks suffered their worst losses in seven years as the failure of investment firm Lehman Brothers Holdings Inc. and the sudden sale of Merrill Lynch & Co. stoked investor fears of even deeper problems in the nation's financial system." Boston Globe

Greenspan calls this a 'once-in-a-century' crisis. So should you steer clear of stocks right now? The 'experts' seem to think so. This is from an exchange on Larry King Live:

King: Is this a good time to get into the market?

Orman: No. It's not a good time to get in with brand-new money. I would let these markets kind of wash themselves out....Are you kidding? These are the markets that you just sit on the sidelines and wait on the sidelines and stay away from them until everything works out.

Well, I disagree. I think the best time to get in the market is when everyone else is getting out. No one can time the market but I think if you have the right long term investment strategy this is as good a time as any to get in the stock market. Market emotions tend to cause people to make poor investment decisions as illustrated by the following two graphs.

What do you think? Also, does this make peer to peer lending more or less attractive?

Tuesday, September 16, 2008

Pennsylvania lenders booted from Prosper

Pennsylvania appears to be one of the least friendly when it comes to peer to peer lending. One year ago we reported that Pennsylvania borrowers avoided Prosper due to the low rate caps. Borrowers residing in Pennsylvania could only request loans at 6% and below due to aggressive state regulations. Few lenders were willing to risk their money for such a low return. The situation changed in April when Prosper raised the rate cap for all states to 36%.

Now p2p lending has a new problem in Pennsylvania - lenders are banned. Here's the announcement from the Prosper blog.

"We have made the decision to discontinue accepting new lender registrations, and new bids from existing lenders, from residents of the Commonwealth of Pennsylvania. Our decision to make this change was based on our ongoing discussions with regulators in Pennsylvania, which led us to believe the change was necessary to comply with their current interpretation of their state regulations.

We have notified existing lenders residing in Pennsylvania of this change via email and at the point of signing into their Prosper accounts. Existing lenders residing in Pennsylvania will continue with their existing lender agreements, have their existing loans serviced, and be able to transfer funds out of their Prosper account. However, they will not be able to place new bids on listings or transfer money into their Prosper accounts.

This change does not affect borrowers residing in Pennsylvania, who remain free to create loan listings on Prosper."

Wednesday, September 10, 2008

Loanio touts platinum verification and co-borrowers

After nearly a year of anticipation, Loanio's launch appears imminent. In a email to potential users last week, Loanio announced, "In just a couple of weeks (yes, we mean it this time!), we will be done with the final touches and ready to roll out!"

Loanio CEO Michael Solomon has let us peek under the hood and we have some exclusive screen shots.

Loanio homepage

Borrow on Loanio - Unlike other p2p lending sites, Loanio allows partial funding. As seen on borrower page (below), "If enough bids equal 100% of your loan, it automatically gets originated. If the bids equal more than 35%, but less than 100% of your loan, you can accept less or try again."

Lending on Loanio - As seen below, lending on Loanio is similar to other p2p lending sites. At FINOVATE, Solomon told the audience, ""We believe that the use of co-borrowing and plantinum listings will provide a greater amount of security and confidence to lenders."

Co-borrow on Loanio - Borrowers have the option to add a co-borrower to their loan. Co-borrowers must have a credit score higher than the other borrower on the loan and must have at least a E credit grade.

Platinum verification - For a small fee, borrowers can improve their odds of funding through platinum verification. Platinum verified borrowers will have the following checked by Loanio - photo ID, income, bank account, employer, address, homeownership.

Loanio credit grades - To borrow on Loanio you must have a credit grade of E or higher. Loanio has established a credit grade system from A+ to F or no score (NC). An E credit grade is equivilant of Experian VantageScore 569-603. With a F or NC credit grade score you must have a co-borrower to use Loanio.

Thursday, August 21, 2008

Fynanz improves borrower vetting

Fynanz made several improvements in the vetting process for new borrowers including the following changes:

  • School certification is obtained directly from a borrower’s school (or a borrower has to provide a school transcript and tuition bill) to verify enrollment, class standing, and whether the borrower is enrolled half-time or full-time.
  • All borrowers are required to provide valid bank account information prior to application approval. If this information is determined to be invalid, the application is rejected until it can be verified.
  • In most cases, Fynanz contacts personal references provided by the borrower.
Some loans that were listed prior to these changes have been canceled prior to funding until borrowers can meet these requirements. In addition, there are fewer available loans as a result of these changes. The available loans, however, are of a higher quality and much more likely to complete the funding process.

Fynanz is the first peer to peer lending company to match most bids from family and friends. They are currently running a promotion where they will give some new lenders up to 5% of the amount loaned.

Fynanz, which just launched a few months ago, has received a lot of publicity due to the current student loan crisis. Today, for example, they were featured in the U.S. News & World Report.

Friday, August 15, 2008

10% off Lending Club fees

New borrowers can get 10% off Lending Club loan origination fees through an exclusive Credit Karma offer.

Borrowers on Lending Club are only charged as a result of an accepted and approved loan. Fees range from 0.75% to 3% depending on the borrower's credit grade. For example, if a C borrower requests $5,000 they will be charged a processing fee of 2% or $100. This borrower would save $10 by signing up through Credit Karma. The fee breakdown on Lending Club fees is:
  • A - 0.75%
  • B - 1.50%
  • C - 2.00%
  • D - 2.50%
  • E - 2.75%
  • F - 3.00%
  • G - 3.00%
The total fee could range from $7.50 (a A-credit grade borrower approved for $1,000) to $750 (a G-credit grade borrower approved for $25,000). Based on these fees, 10% off might only save a borrower with good credit on a small loan less than a dollar. However, a borrower with poor credit requesting a large loan could save as much as $75 through this offer.

Credit Karma is a new company which offers free credit scores. Yes, it's really free. Not one of those tricks where you are suddenly charged monthly fees. I signed up last month. Credit Karma makes money if you sign up for one of the offers which will be presented to you. Credit Karma shows personalized offers, such as this Lending Club offer, based on your credit profile.

The downside for those concerned about privacy - you do have to provide your social security number in order for them to pull the necessary information. Credit Karma claims they "will never share your personal information."

In addition, there are several different types of credit scores - FICO, Experian PlusScore, VantageScore, and others. The score provided to me through Credit Karma was a TransUnion score, not my FICO score. TransUnion's scale is 150-950 unlike FICO which is 300 to 850. It appears Credit Karma may provide different scores to different customers.

I also found Zopa listed on Credit Karma but there were no special offers or coupon codes. Prosper was running banner ads but did not provide other deals.

Thursday, August 14, 2008

Lending Club nominated as top innovator

Lending Club has been nominated as one of the Top 100 Internet innovators in the U.S. by the Industry Standard in the 'Commerce' category. Others nominated include Mint, Zillow, Farecast and Wesabe. The winner will be decided by popular vote and announced at the end of October.

Peer to peer lending companies have received many awards. Earlier this year, Prosper joined Amazon, Walmart, IBM, and others on Fast Company's 2008 list of the 50 most innovative companies. Prosper was also Time magazine's #1 website of the year in 2006 and one of the 50 best websites of 2007. At the 2008 Retail Banker International Forum, Zopa won the 'Most Threatening Non-bank Competitor.'

So, here's the question - if they win are they going to reuse the speech from their 2008 Webby?

Prosper eliminates defaults

In a site update today, Prosper eliminated all defaults - well, they renamed them. Defaults will now be known as "charge-offs". As reported on their blog:

"We are changing the way we display seriously delinquent loans on the marketplace performance page, renaming “Defaults” as “Charge-offs”, and moving the “4+ months late” loans into the “Charge-offs” category. We want to have transparency in the reporting of our marketplace’s default rate, and this change should help lenders take a more direct measure of the market’s charge-off rate. This change is the first step in a larger change we will be making in the way delinquent loans are displayed in lender portfolios."

In addition, Prosper will now allow some new lenders to make loans with PayPal and credit cards. Borrowers can invite family and friends to bid on their loan. After clicking on the link in the invitation, new lenders can place their first bid via PayPal or credit card. This is an attempt to make the site easier to use for new members.

Prosper Releases Market Survey Results

Prosper just released their monthly market survey for July 2008. For the first time, the survey includes statistics showing how borrowers who list and get funded in the Prosper marketplace indicate how they plan to use their personal loans. Also noteworthy, the percentage of prime borrowers (borrowers with 720+ credit scores) hit an all time high in July, accounting for 47% of funded loans.

July 2008 Funded Loans
  • Personal Loan for Debt Consolidation - 43%
  • Personal Loan for Business Use - 25%
  • Personal Loan for Home Improvement - 7%
  • Personal Loan for Education - 3% (Fynanz is trying to own this niche)
  • Personal Loan for Auto/Vehicle - 3%
  • Personal Loan for Other Use - 19%
Last year, soon after Lending Club launched, Lending Club released similar statistics showing their "smart" borrowers were requesting most loans for debt consolidation or to pay of higher credit card rates.

Friday, July 4, 2008

Movie director promotes Lending Club (again)

Chris Barrett, film director and award winning movie producer, just published a book called Direct Your Own Lifewhere he promotes Lending Club as one way to finance your dreams.

Last year Chris Barrett won $3,000 in Lending Club's video contest. Chris Barrett's video, complete with an actual script and actors, shows a girl who is getting her Paris Hilton news through magazines instead of the internet since her laptop broke. "I can't believe their putting Paris Hilton in jail," she exclaims to her friend who can't believe she's so behind the news. The friend suggests Lending Club to borrow the money and replace her computer.

Here is a short excerpt from the book where Barrett discusses Lending Club:

Still can't find anyone to invest in your project? Look online. Today, a new way to finance just about any dream you have is peer-to-peer lending. One company at the forefront of this innovation is called LendingClub.com. Instead of maxing out a credit card to start a new business, you can take out a loan from a group of people at a lower interest rate than you would pay to a credit card company or bank. All you need to do is post your loan request on the site so that potential investors can get an idea of what your project is. This arrangement is a win-win for investors and borrowers, because investors split up the investment so that any losses they might suffer will be small, which in turn causes the borrower's interest rates to be small as well. For example, right now, on LendingClub.com, a member needs $25,000 to start a DVD vending machine rental company. He has already had $24,300 invested, so he only needs $700 more before his loan is filled and he will be able to launch his company.

Thursday, July 3, 2008

Academic article on Prosper published - Dynamic Learning and Selection

Seth Freedman and Ginger Zhe Jin from the University of Maryland have published an academic article on Prosper called Dynamic Learning and Selection: the Early Years of Prosper.com.

Freedman considers the article a preliminary draft. Since first publishing the article they have already made a couple minor changes to the abstract and the introduction with an effort to to stress that the rate of return they calculate is the expected rate of return as opposed to the realized rate of return.

Abstract - Dynamic Learning and Selection: the Early Years of Prosper.com

This paper studies a new business model on the Internet. Prosper.com, the first peer-to-
peer lending website in the US, matches individual lenders and borrowers for unsecured consumer loans. Since its inception in February 2006, Prosper has attracted over 500,000 members and has originated loans of over $100 millions. How do individual borrowers and lenders behave in this new marketplace? On what ground can Prosper survive the competition with traditional banks? Is Prosper positioned to replace the traditional lending market or serve a market that the banks have missed? We attempt to address these questions using the full transaction history since the birth of Prosper.com.

Compared to the traditional market, Prosper decreases operation and search costs, but may face information costs associated with anonymous online interaction. To overcome the information problem, Prosper has implemented a number of policies over the past two years. Our primary goal is to document the dynamics on both sides of the Prosper market, while accounting for changing Prosper policies and the macro environment.

We have several findings. On the borrower side, we find that the overall observable risks have worsened over time for the pool of listings. While part of this change is driven by the macro environment, Prosper policies are effective in countering this trend, especially for the sub-prime credit grades. On the lender side, we find that the risk perception that lenders apply to key borrower attributes is by and large consistent with how these attributes correlate with the loan’s ex-post performance, but there are significant exceptions. Over time, lenders exhibit significant selection and learning. This learning includes better understanding of the risk of low credit grades and group member loans.

Overall, we conclude that Prosper is evolving from a comprehensive market toward a market that primarily serves borrowers who have access to traditional credit. Using the estimated relationship between loan attributes and loan performance, we estimate the rate of return that a fully rational lender could expect if he can perfectly predict the probabilistic distribution of loan performance conditional on these attributes. If Prosper loans continue to perform according to what we have predicted from their existing performance, this average annual expected return on the funded loans will be approximately 6%. This return has varied by time and has been increasing as the composition of the funded listings shifts toward better credit risks.

Please see details about the empirical methods and assumptions in the full paper. Freedman said they will update the article with more current information later in the summer. The current data set used runs through the end of 2007.