P2P Lending Predictions for 2008

As we get ready to bring in the new year here are what a few news organizations around the world have to say about P2P lending...

Ten things that will change your future from the Sydney Morning Herald

"PEER-TO-PEER LENDING Whether you're distributing music or books, auctioning off unwanted household items, wanting to bet on a horse race or looking for a soulmate, the internet can put you in touch with someone who is interested in what you have or are.

Kiva takes that idea and applies it to the established concept of microfinance - making small loans to the working poor to help them establish or expand businesses.

So, instead of giving a donation to an organisation such as Oxfam to distribute, peer-to-peer lending lets you invest small amounts directly in a particular entrepreneur - such as Mohamad Marah in Kabala, Sierra Leone. With his $US200 loan, Marah has been able to expand his garment business, buying three extra sewing machines. So far he has repaid half the loan. More than $US15 million has already been lent through Kiva - and the default rate is claimed to be just .23 per cent. http://www.kiva.org"

Many using Web sites to find, help entrepreneurs around the world from the North Jersey Media Group

"...Some philanthropy experts worry that the peer-to-peer lending sites could suck away money from traditional charities such as UNICEF. And microlending has its share of critics..."

Get real: People will want to connect in 2008 from the USA Today

"Eisenbeis says we should expect to see more examples of 'people banding together to help each other out,' whether it's groups picketing home loan companies or individuals starting so-called peer-to-peer lending programs to assist those experiencing foreclosure and personal bankruptcy.

'There's a 'we're all in it together' feeling out there that's only going to grow as more people get affected by issues such as housing and health care,' Eisenbeis says. 'People are going to lean on each other and push those in power to find the necessary solutions.'"

Peer-to-peer lending the 'eBay of loans' from Deleware Online

"The market for the loans is still relatively small but growing fast, according to Celent, a research firm. Celent projects that $5.8 billion in peer-to-peer loans will be made in the U.S. by 2010, an 800 percent leap from the amount this year...

The more established players -- such as Prosper and CircleLending, which sold a majority stake in the company and rebranded itself Virgin Money US this year -- dominate the business. But more rivals are entering the industry at a time when even people with good credit are finding it harder and costlier to borrow from traditional sources.

In December, Zopa opened up shop in the U.S. Also this month, Lending Club, which began as a service for Facebook members, expanded nationwide.

'It seems that the credit crunch is accelerating our growth,' says Renaud Laplanche, CEO of Lending Club."

P2P Lending Review: Best of 2007

The P2P lending market has changed significantly in 2007. One year ago the only P2P lending story was Prosper. Time named Prosper the top website of 2006. BusinessWeek predicted that Prosper would be one of the Top Eight Tech Companies to Watch in 2007. A year later, Prosper continues to make headlines but several other p2p lending companies are making news as well. Here are a few highlights from 2007:


Prosper

• Named one of the 50 best websites of 2007 by Time
• Passed $100 million in loans (now at $108 million)
• Changed the way they interact with members - after several forum riots and other tense public clashes with some members Prosper deletes their forums without notice and re-opens another more moderated forum; started an official blog; starts a monthly lending market survey; starts webinars to educate new lenders and borrowers
• Registers with SEC to create $500 million secondary market for p2p loans
• Announces plans to spread to Japan
• Receives $20 million in venture capital for a total of $40 million raised
  

Lending Club

• Launches inside of Facebook and loans $100,000 during the first month (now at $4.5 million)
• Expands to users outside Facebook
• Becomes the first p2p lending platform to loan to borrowers nationwide without state-by-state lending caps
• Hosts popular YouTube video contest
• Receives $10 million in venture capital
• (Disclosure: I recently started blogging for Lending Club. Read my Lending Club posts here.)

Zopa

• Expands from the U.K. to the U.S.
• They announce a very new P2P lending model comparable to a certificate of deposit at a bank or a termshare certificate at a credit union. You also have the option to reduce the rate to help out borrowers. The loans are federally insured and currently earn 5.1%.

Circle Lending/Virgin Money

• Richard Branson purchases Circle Lending and rebrands it as Virgin Money USA
  

GlobeFunder

• Announces they will launch on October 2nd but then delays for "lending licenses and website development"
• This week they just launched a new webpage and appear to be open for institutional lenders and will allow borrowers to sign-up, but individual lenders must wait

Loanio

• Receives some minor attention in the media during the summer and, like GlobeFunder, announces they will launch in the fall but delays
• Currently advertising on homepage that they are "Coming January 2008"
  

In June we started Prosper Lending Review. It's been fun and we have learned a lot. According to visitors, these are our most popular articles in 2007.

15 Most Popular Articles of 2007

A Prosper scam: The story of Jessica Wolcott
Prosper: A hands-on education in risk management
How does Prosper compare to other investments?
Prosper Lending Review - the first month
When to bid on Prosper loans
Review: Top Prosper Blogs
What is Loanio?
Borrowing money to lend on Prosper: Wise or Foolish?
Credit Scores on Prosper - Part 1 of 2
Why would a borrower use Prosper instead of a traditional bank?
Equity sharing - Prosper for real estate
Loanio prepares for fall launch
Prosper Lending 101 - webinar review
Prosper CEO: Lenders avoid subprime and 'flight to safety'
Lending Club announces $5000 video contest

The most popular articles are not always the most useful articles. While A Prosper scam: The story of Jessica Wolcott may be interesting reading, it is not going to provide solid actionable investment advice like some of the following articles. If you are about to commit your hard earned money to p2p investments it makes sense to do as much research as you can. Of the 100+ post of the last year I recommend that following ten as required reading for all investors (I'll also note they they were all written by the other co-author of this blog, Matt):

10 Best PLR articles of 2007

How does Prosper compare to other investments?
Prosper: A hands-on education in risk management
Why would a borrower use Prosper instead of a bank?
Borrowing money to lend on Prosper: Wise or Foolish?
Most Prosper lenders do not diversify
Are all Prosper loans within a credit grade created equal?
An analysis of pre-payment risk on Prosper loans
Are non-homeowners a safer lending risk in a declining house market?
Credit Scores on Prosper - Part 1 of 2
When to bid on Prosper loans

We look forward to 2008 and the many changes it will bring to the p2p lending marketplace. Happy New Year!

Debt sale on Prosper: 701 loans

701 defaulted loans have been sold to debt buyers for prices ranging from 2.8% to 14.5% of principal. This is the largest debt sale on Prosper with more than twice as many late loans sold as the previous largest debt sale three months ago.

Here are the results of the debt sale as reported by Prosper:

Debt Sale Weighted Average Prices

• Homeowners - 12.5%
• Non-homeowners - 7.3%-9.6% depending on credit grade (NC was 4.8%)
• Texas (all) - 3.5%

Unlike the most recent debt sale, homeownership played a significant role in the final sale price.

Lending Club increases interest rates 0.5%

Good news for lenders and bad news for borrowers. Lending Club has been swamped with new loan applications since they went national last week and eliminated state loan rate caps. This has created an imbalance between borrowers and lenders with more borrowers requesting funds than lending capital available. In order to adjust the equilibrium, Lending Club will increase their rates 0.5%. This will only apply to new loans initiated starting tomorrow. Currently about 90% of borrowers requesting a loan through Lending Club are funded. By increasing the loan rate, Lending Club hopes to keep the fully funded percentage high.

In addition, Lending Club recently announced a very nice bonus for lenders - 5% cash bonus if you lend $5,000 or more by February 3, 2008. This is on top of the $25 referral bonus if you sign up through a referral link.

Prosper announces debt sale and more aggressive collections

On the official forums, Prosper has announced a debt sale and an aggressive debt collection pilot program.

Debt sale: As reported on December 22nd: "We have recently concluded bidding on a package of Prosper loans and are in the process of negotiating terms of the Purchase Sale Agreement with the winning bidder. We are looking to execute the sale as soon as possible."

Aggressive debt collection pilot: As reported on December 22nd: "Prosper is testing a collection law firm and is recording this on member accounts as 'New Agency Test'. This is a limited pilot to test the process of collecting more aggressively on Prosper Accounts. Thus far, in approximately one month, we have seen an uptick in payments and promises to pay in almost 10% of the accounts and the law firm has had direct contact with more than 1/3 of the accounts in the test. These results are encouraging. Actual suits will be initiated on the non-payers in early January. We expect an additional 5% of the accounts to come to terms once they receive service of process."

I'm surprised that Prosper didn't choose to make these announcements on their new blog. Thanks to Rateladder for notifying us of these changes on his blog (debt sale, debt collection pilot).

Credit crunch solutions

Pennsylvania's Pittsburgh Post Gazette interviewed Lending Club's CEO as part of a special six-part series on coping with the credit crunch crisis. A couple months ago they featured Prosper founder Chris Larsen. Here's a short excerpt from the article:

"Many people who previously would have been able to borrow from banks months ago find themselves in a situation where they are being turned down. Some of those people are turning to social lending networks like Lending Club.

Renaud Laplanche, CEO of Lending Club based in Sunnyvale, Calif., said lenders in the online community are regular people who don't operate under the same restrictions banks do and are not affected by the credit crunch.

He said loan volume has been increasing 100 percent each month since the company opened in May. This month, about $4 million in loans were made through the Web site. The three-year unsecured loans are $5,000 to $7,000 at interest rates of between 10 percent and 12 percent.

'It's a good rate for the borrowers and an attractive rate for the lenders,' Mr. Laplanche said, adding that the default rate is less than 10 percent. 'I think the credit crunch is a contributing factor (in the increased volume.) There are other factors, but the credit crunch is a main factor.'"

ScriptLance project: Prosper or Zopa clone

This is a time of dramatic growth for the p2p lending market. Over $100 million has exchanged hands on Prosper and investors have provided over $40 million in venture capital. Lending Club is growing rapidly, has expanded nationwide, and received $10 million in venture capital. GlobeFunder missed their planned October launch but should be opening their doors soon. Loanio also missed their planned fall launch but should open in the Spring. Zopa recently received $13 million in venture capital and expanded to the U.S. Canada's CommunityLend just raised $2.5 million and will be launching soon.

This exciting growth and the mainstream adoption of p2p lending in the general public will cause new p2p lending companies to emerge in the U.S. and throughout the world. We have observed several projects on freelance coding websites to build "Prosper clones."

1. The first advertisement was in late June on Rent a Coder. The winning bid was Hiren Kotadiya from India who agreed to build a Prosper clone for $250.
2. Next we found an ad on iFreelance.com from someone looking for help building a peer-to-peer lending site.
3. A third ad in July on ScriptLance asked for help building a site similar to Prosper.com.
4. A fourth ad, also in July, on Getafreelancer.com asked for someone to build a P2P lending site for the Asian market.

Another project just appeared on ScriptLance. Someone wants to build a "Prosper or Zopa Clone." The project budget is $300-600 and here is the description:

"We are looking for clone of either Prosper or Zopa or a mix of these two sites. We need full design, programming and setup of the website and the underlying databases. the clone must not be violating copyrights of prosper nor zopa.

1. Programming languages to be open source (e.g. PHP/mySQL)
2. has the features and functionalities of prosper or zopa
3. online payment gateway integrated
4. Daily communication / update during website building is necessary (via email/msn/or PMB)
5. Bidders please state clearly your delivery timeframe and link of demo. Thanks for bidding!"

As venture capital continues to flow into p2p lending companies we will see more competitors emerge.

P2P Lending Report: Disruptive service or market niche?

Veteran analyst Jim Bruene, who runs NetBanker, has just published a 48-page report about Prosper, Lending Club and Zopa - Person-to-Person Lending 2.0 - Disruptive service or market niche? As part of the research process he became a lender and a borrower at all three major U.S. P2P lending exchanges: Prosper , Zopa, and Lending Club. He also set up friends and family loans at Virgin Money USA and LoanBack.

The report was originally expected to come out earlier but due to the rapid changes in the market he delayed the report. As he explains on Netbanker, "I had originally intended on publishing it in early December. But as I was trying to wrap things up, Zopa launched its new U.S unit. So I stopped the presses and added an analysis of its unique model. Then as I was finishing that, Lending Club made a significant change last week, becoming a national lender instead of state-sanctioned one. That too is now in the report."

Here's the abstract:

Person-to-person lending is the perfect product for the Web 2.0-social-networked consumer. Why, then, has growth been relatively slow compared to other networked services? Because it’s a difficult business. Not only are P2P lenders competing with 20,000 other financial institutions for good borrowers, the are up against thousands of investment alternatives for funds to lend, all the while waging a fierce battle with fraudsters and deadbeats. It’s not a business for the faint of heart.

In this report, we look at the market as a whole, examining the strengths and weaknesses of existing products. We list opportunities both for web-based startups and existing financial institutions and lay out a ten-year market forecast. Finally, we take a close look at the four major U.S. P2P lenders: Prosper, Lending Club, Zopa and Virgin Money.

If you would like to have a copy of the report you can get it here. It's only $595.

P2P lending blogs - Lending Club and Prosper

Last month I started blogging for Lending Club. The focus is more personal finance than peer to peer lending. Here are a couple of my recent posts:

• How salaried employees can increase their hourly rate - a discussion of an article I found on OmniNerd.com called Paid Twice a Month versus Every Two Weeks.
• Seven steps to wealth - What does Dr. William D. Danko who wrote The Millionaire Next Door - The Surprising Secrets of America’s Wealthy have to say? Believe it or not, the wealthy are not usually those that make the most money.
• Avoid Lending Scams - In connection with my blogging here on PLR I received a letter from a lady who was a victim of a lending scam. On the Lending Club blog I shared excerpts from her letter and tips from the FCC on how to avoid these scams.
• Gambling away wealth - Gambling is one of those money suckers that can quickly consume your income before you know it.

I've enjoyed being part of the blogging team and have learned a lot from the other personal finance bloggers. Two recent articles from DebtKid were quite popular on Digg - 7 Mistakes Geeks Make With Their Money (and How to Fix Them!) and 7 Dating Tips - Ideas for How to Save Money.

New Prosper blog - Propser started a new blog two weeks ago and today they announced that Rateladder will be the editor-in-chief. Rateladder runs several peer to peer websites (RateLadder, ProProsper, and P2P No Bank) and has been a lender on Prosper since July 2006.

So far I've been quite impressed with Prosper's blog. They have pulled in several great writers with different perspectives. Here's a quick run down of the highlights:

• LazyMan, runs Lazy Man and Money blog - Do You Need a Budget? and How Many Income Streams Do You Have?
• Brett McKay, author of The Frugal Law Student - 6 Ways To Save on Traveling This Holiday Season
• The Silicon Valley Blogger (SVB) from The Digerati Life - 10 Super Strategies To Manage Your Debt
• Omahajay - Lender experience
• Mapgirl from Mapgirl’s Fiscal Challenge - Why I Love Being a Prosper.com Lender
• Eric Petroelje from ericscc.com - Follow the Leader: Watching Lenders and Groups on ericscc.com
• Mike from Prosperous Land - Diggin’ For Gold Around The Portfolios

In addition to a variety of guest posts, the Prosper blog also has updates from Prosper staff. This is a welcome addition and something I asked for when I reviewed the top Prosper blogs last summer. Previously Prosper had communicated with users through their forum and John Witchel's (Prosper CTO) blog on prospers.org. That prospers.org blog has since been removed and there is quite a online battle right now with some dissatisfied users. The blog is certainly a step in the right direction to communicate effectively with the public.

Notorious Prosper borrower gets 21 months in jail

Jessica Wolcott, or JessM as she is known on Prosper, created quite a stir in the forums last year as she attempted to borrow $20,000 while juggling a half dozen other scams. (See our earlier coverage - A Prosper scam: The story of Jessica Wolcott). Wolcott, 23, tried to extort $125,000 out Pepsi Bottling Group Executive Vice President Gary Wandschneider after meeting him on online.

She has been sentenced to 21 months of jail time. "Ms. Wolcott is a grifter," said the U.S. District Judge at the sentencing in White Plains. "She is a con artist." Surprisingly, her $20,000 Prosper loan is still current.

More coverage:

White Plains Journal News - Woman who extorted corporate executive gets 21 months

New York Post - GAL GETS POPPED

Motley Fool - Grifter Sentenced for Online Extortion

Pittsburgh Tribune-Review - 'Con artist' sentenced to prison term

Lending Club eliminates state rate caps

A variety of different state by state rates and regulations for borrowers on Prosper and Lending Club have slowed the adoption of p2p lending throughout the United States. For example, if you check out Prosper’s state licenses and lending limits chart you can see that borrowing is not permitted for those that live in some states (like Nevada) and is restricted to businesses in some states (like North Carolina) and has very low rate caps in some states (like Pennsylvania). This can be very confusing for borrowers. In fact, we highlighted Pennsylvania in an article a couple months ago - Pennsylvania borrowers avoid Prosper.

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 #43 despite their large population. Almost all of these 21 loans are for the minimum loan amount - $1,000.

Some people have attempted desperate measures to obtain a p2p loan despite the rate caps. Eric, who runs deepmarket.com, tried to get a loan on Prosper despite an 11% cap on loans from Virginia. He even offered double interest on the side by immediately paying lenders through PayPal but his loan still did not fund.

Lending Club has finally eliminated all this confusion – they are available to borrowers in all states and are not bound by state interest rate limits any more. In the official announcement, Lending Club CEO Renaud Laplanche said, “We went National today, 6 months after the launch of our Facebook application and 3 months after the limited opening of our public website at http://www.lendingclub.com/.” He estimates that this will open up their platform to an additional 108 million borrowers.

From May 24 to December 14 Lending Club has issued 505 loans worth nearly $4 million. Prosper, which has been around longer, has issued over $100 million in loans. While Lending Club is now available to many more borrowers they still limit borrowing to users with a FICO score over 640. They have had over 4,000 loan applications worth $36 million which have been disapproved.

Read more here:
TechCrunch - P2P Loans GainingTraction. Lending Club Goes Nationwide
Mashable - Lending Club 6 Months Later: Does Peer-Lending Work?
CenterNetworks - Lending Club Now Offers Loans in All States; Releases Six-Month Loan Data
Technically Speaking - Lending Club is now live nationwide in all 50 states

Disclosure: I currently blog for Lending Club. Read my Lending Club posts here.

Wild and crazy 'pinko commie' p2p banking notion

Back in 2001, five years before Prosper launched, Eliot Van Buskirk a senior CNET editor wrote an article about "wild and crazy" peer to peer ideas. Napster and music sharing was what everyone thought of when you mentioned p2p but people were begining to expand on the power behind interacting with peers. Buskirk titled the article My Pinko Commie P2P Notions and wrote, "Just because this architecture has made inroads in the area of music sharing doesn't mean that it can't be used for all kinds of other things. I've come up with a few wild and crazy ideas of my own for using peer-to-peer technology to replace everything from our electricity grid to the bank system. While some of these schemes are more plausible than others, they all demonstrate how powerful the concept of P2P really is. Shockingly, all of these ideas are (gasp) very, very communistic in nature, which might say something about where technology's taking us."

After p2p cell phones, p2p electricity and others he unveils p2p banking:

P2P banking

It's fairly common knowledge that the money in our bank accounts isn't sitting in some vault somewhere. Banks make money by loaning your money out to other businesses and individuals at a higher interest rate than they give you for loaning your savings to them. Instead of using a centralized lending service to transfer money from investors to borrowers, a P2P network in this capacity would directly match up chunks of money with chunks of debt, minus the bank part of the equation. Borrowers would run a node specifying how much money they need, for how long, and at what interest rate. Similarly, investors would tell their software how much they want to lend, for how long, and at what rate. Even though the likelihood of a one-to-one match between an investor and a borrower would be very small, the system would be able to work out complex arrangements to make the whole thing add up. Borrowers might be loaning from 50 different people at 50 different rates that work out to be exactly the deal they're looking for when all the rates are averaged. Likewise, investors might be lending their money to 500 different borrowers at 500 different rates that average out to the figure they specified. The P2P architecture could supplant the banking industry as we know it, with money flowing more efficiently between borrowers and lenders. Banks would no longer be able to charge tolls on money as it passed through their system.

Well, not too bad. I'd say he predicted the p2p lending market pretty well.

(CNET article found via Buskirk's comment on TechCrunch article - P2P Loans GainingTraction. Lending Club Goes Nationwide)

Canada's CommunityLend raises $2.5M

Toronto-based CommunityLend.com is now one step closer to launch. They have secured $2.5M in venture capital funding and have announced a board of directors including Barry Campbell, former MP and Secretary to the Minister of Finance and Jim Jones CEO of GMAC Residential Capital. The $2.5M came from a mix of individuals and institutions from the US and the UK.

In a statement on their website CommunityLend said, "The process that we have just gone through to raise our own capital was not so dissimilar to the process that borrowers will be going through at CommunityLend.com to raise theirs. We believe this alignment around the work and process involved in collecting people around a financial request has made us better facilitators for our customer’s financial needs."

CommunityLend hopes to tap the estimated $110-billion (Canadian) unsecured consumer debt market in Canada as soon as spring 2008. While P2P lending options have greatly increased in the U.S. over the last several months Canadians still do not have any social lending options.