Globefunder opens doors to borrowers

We have been eagerly waiting for GlobeFunder for several months. They have finally opened their door for borrowers and institutional lenders. Opportunities for individual lenders are still "coming soon."



Today Columbus Business First published an article with even more information that GlobeFunder's own FAQ. GlobeFunder promises to be less social than other social lending sites and focus instead on borrower's financial profiles. Here's an excerpt from the article:

"Interest rates for borrowers on GlobeFunder range from 8 percent to 20 percent. GlobeFunder makes its money by charging a onetime 1.75 percent fee to borrowers on their loans, and charging lenders 50 to 100 basis points of their investment over the 24- to 60-month loan term, Decio said.

A basis point is one-100th of a percent.

GlobeFunder is responsible for servicing, collecting and, if necessary, selling nonperforming loans to debt collection firms, Decio said.

The risk for lenders is that they are out of their investments if borrowers don't repay the loans, but they will receive the proceeds from a sale of the debt to another company, Decio said. That's why lenders, who must pledge a minimum of $500 per loan, are encouraged to fund portions of several loans, rather than putting all their money into one borrower, Decio said.

'It's not brain surgery - I wouldn't buy three loans at $8,000 each,' he said.

Loans on GlobeFunder will range from $2,500 to $25,000.

For borrowers, the site may prove attractive because it will set interest rates based on a credit profile, unlike credit card companies, which give few rate breaks for good credit, Decio said.

GlobeFunder requires a minimum credit score of 640 for borrowers.

'We've got over 90 million people out there that don't have risk-adjusted rates,' he said. 'Either they're lazy or they don't recognize there's a way to consolidate and save money.'

GlobeFunder's approach differs from other person-to-person lending sites.

Its interest rate ranges are based on borrowers' financial profiles, and the site eschews photographs and personal stories from borrowers about why they're looking for money - a tactic other companies have used, Decio said.

'You're not going to see pictures and big stories about people's lives,' he said. 'We're not going to do that because it's not scalable.'

Decio said GlobeFunder's approach, coupled with a more systematic way for setting rates and arranging loans, could allow the company to attract institutional investors that will lend on a large scale.

Other sites have taken more of a social networking approach."

GlobeFunder's homepage currently lists several sample loans using a globe rating that corresponds to credit scores (Experian ScorexPLUS). The highest rating, five globes, goes to borrowers with 780 or better while those with scores from 640-659 get one globe.

While GlobeFunder is not yet accepting individual investors, they are inviting institutional lenders. On their institutional investor page they provide the following information:

"From time to time, GlobeFunder Ventures, Inc. ("GlobeFunder") may make information available to pre-qualified individuals or entities regarding certain private investment opportunities. GlobeFunder will not act as a broker, dealer, or placement agent, or be paid a transaction based fee with respect to any such opportunity. Access to information regarding privately offered investments is limited to individuals or entities that qualify as accredited investors, and which meet other qualifying standards. All private investments will meet the conditions of Regulation D under the U.S. Securities Act of 1933, as amended. If you would like more information, please complete the Registration Form and Accredited Investor Questionnaire. We will review the form and questionnaire and contact you within 30 days."

GlobeFunder is led by Brian Mullally and Benjamin Decio. Their strategic partners include Computer Science Corporation, Brooks Fl Solutions, eDominate, and Articus Ltd.

Credit Scores on Prosper - Part 1 of 2

Credit scores are the most important indicator in determining what rate you will pay when you borrow money. The worse your credit score is, the more you will have to pay in interest on your loan. Your credit score is made up of a number of components including the length of your credit history, the amount of debt that you carry, recent credit inquiries by lending institutions, and the number of late payments or defaults that you have on current or prior debt. Sometimes this score is called a FICO score because it is generated with software from Fair Isaac and Company.

There are three credit reporting agencies that produce credit scores: Equifax, Experian, and TransUnion. Each of these collect information about borrowers independently and the accuracy and quantity of information on a borrower can vary among the credit agencies. Because of differences in the data collected, the score for a given borrower can also vary among these credit agencies. Some lending institutions partner with one of these credit agencies and use them as an exclusive provider of credit scores and content, while others obtain data from all of the credit agencies when making a loan decision. Prosper exclusively uses Experian while Lending Club exclusively uses TransUnion for their credit data.

According to MyFico.com the distribution of credit scores for the general population is heavily weighted to the higher end of the spectrum with most scores falling above 700.



Prosper uses credit grades rather than displaying the raw credit scores. The following is a chart that explains that correlation.

Grade	AA	A	B	C	D	E	HR
Score	760 and up	720-759	680-719	640-679	600-639	560-599	520-559

I must say that when I came across this data I was quite surprised by this distribution. Matching the two sets of data together, we realize that E and HR borrowers combined represent only about 11% or 12% of the population (people below 520 cannot currently borrow on Prosper). Nearly half of the population falls into the AA or A credit groups.

Okay, ready for some shocking statistics? Here is the current breakdown of active loan listings on Prosper as of the writing of this listing:

Grade	AA	A	B	C	D	E	HR
Number of Listings	54	56	113	230	382	500	1308

Roughly half (49.4%) of the current loan listings are for HR borrowers, with only 2% for AA borrowers, and 2% for A borrowers. This is shocking when you consider that combined A and AA borrowers make up half of the general population while HR borrowers account for less than 10% of the general population.

One effect this has is that when lenders see an A or AA listing they think they are lending to the cream of the crop - the top 4% of borrowers. While, when lending to Bs or Cs they may be thinking, "This isn't too bad, I am still in the top 15% of loans". In terms of the number of Prosper loan listings they would be correct. However, in terms of the general population, lending to AA and A borrowers just puts you in the top half of borrowers, while Cs could put you in the bottom 25%.

This also clearly demonstrates that many borrowers are using Prosper as a lender of last resort. People who are unable to obtain credit elsewhere because of their low credit scores are flocking to Prosper in an attempt to obtain financing on their loan. Anyone with a score below 620 is considered subprime, which is the middle of the D credit grades on Prosper. With scores below that, many of the Es and most of the HRs would find it difficult to obtain a loan at any rate from traditional financial institutions.

The distribution of loan requests on Prosper suggests that Prosper is having difficulty attracting mainstream borrowers in the higher credit grades. This makes it difficult for lenders that want to lend large sums of money to borrowers in the top credit grades. These lenders are forced to spread the money out over a long time period, or aggressively bid down the rates on the small number of loan requests in the high credit grades. (See my previous article for why someone with good credit would want to borrow from Prosper.)

This is part 1 of a 2 part article about credit grades. Watch for an upcoming post in which I will describe how you can obtain a free credit report, dispute inaccuracies on your report, and monitor your credit. In part 2 I will also discuss how much it can cost you to have a poor credit score.

Edit/Clarification: In this post I compared FICO scores in the top graph to Experian's ScoreX scores used by Prosper. FICO scores run from 300-850 while ScoreX are from 330-830. There is really no one in the 830-850 range anyway, so trimming that doesn't really have an effect (same onthe bottom end of the scale). Although Experian's ScoreX scores are mathmatically scaled to match FICO scores they are produced by a different algorithm and could result in slightly different data. The overall analysis in this post should hold but the percentages may vary. Here's a short explaination from Wikipedia on the difference betwen FICO scores and Experian's ScoreX score:

For easy use, most scores are mathematically scaled so that they fall in the general range used by prominent scoring model competitors. Since the Fair Isaac Corp. provides the dominant scoring method, non-Fair Isaac method-generated scores often mimic FICO scores, (they often are derisively called "FAKO" scores).[1] Although not as widely used, these scores (e.g. TransUnion's "TransRisk", Experian's "ScoreX", and "PLUS" scores), are less expensive for borrowers to buy than is the FICO score. The business cost savings of buying and using non-FICO scores is financially tempting to some banks and credit card companies to use, as they need accurate risk assessment of millions of accounts.

Update: Part 2 of this article, which covers free credit reports, claim disputes and the importance of good credit is here.