P2P Lending News

Lending Club, the P2P lending marketplace which re-opened with SEC approval last October, has seen steady and impressive growth through the first half of 2009. The company has funded $18.2 million in loans since January 2009, and loan growth has averaged nearly 7% month-over-month during that period. According to a blog post in June by CEO Renaud Laplanche, as of May 31, Lending Club had 140,000 registered users.

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Vittorio Levi, CEO of Centax S.p.A. and Boober Italy, was kind enough to answer some questions about Boober Italy and the state of prestiti personali in Italia, or P2P lending in Italy.

The most recent news from the Boober brand is that the original Boober site in the Netherlands was shut down earlier this year by Dutch regulators. Can you give us some information about whether Boober has plans to re-open in the Netherlands, and how Boober Italy is related to Boober Netherlands?

Boober.it started in November 2007 as a joint-venture between Boober International and Centax (which is a financial service Italian company mostly focused in check services). Boober Italy acted as a licensee of Boober International which was owner of the brand, the platform and the market rights for all of Europe. In October 2008, Boober International decided to discontinue their activity and Centax decided to buy 50% of Boober Italy, the Boober brand, the website platform, and the right to open sites in all European countries except for the Netherlands. As far as Boober.nl is concerned, we have no visibility of their plans but I believe they will not re-open in the future.

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If you counted Loanio out after issuing only $14k in P2P loans last fall, you’ll be surprised at this recent second wind. On Tuesday, they filed an S-1 with the SEC, and over the last few months, have been posting job listings for a Chief Operations Officer (COO), Chief Technical Officer (CTO), Chief Marketing Officer (CMO), and VP Finance.

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Loanio, the little P2P lending company that could, has filed an S-1 with the U.S. Securities and Exchange Commission to offer $50 million in peer-to-peer loans through their web site at Loanio.com. As Loanio makes clear in the email that announced their filing, the registration statement relating to the securities has been filed but has not yet become effective.

This regulatory filing is similar to the first steps taken by Lending Club, Prosper, and IOU Central. (To date, only Lending Club has been approved.) Unlike Prosper and Lending Club, however, who had originated millions in loans and had the opportunity to test their platforms and raise money before submitting to the will of the SEC, Loanio has had a tough row to hoe. According to the S-1, Loanio was formed in April 2007 and eventually launched on October 1, 2008, only to be shut down eight weeks later on November 25.

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Microlending darling Kiva has announced today that they will start allowing lenders to fund loans to Americans. Although Kiva has facilitated over $75 million in loans to entrepreneurs (Kiva calls them “the working poor”) in developing nations since 2005, this is the first time that American residents have been able to take advantage of the Kiva platform from the borrowing side. Kiva cites the current credit crisis in the U.S., which prevents entrepreneurs from raising the cash they need to keep their businesses going, as a primary motivator.

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Prosper recently filed a fourth amendment to its regulatory filing with the SEC. This new revision of the peer lender’s S-1 has removed the concept of “Open Market Loans” entirely, and seems to focus Prosper back on track to simply being a loan originator with a secondary market. See coverage of past filings here.

Prosper re-launched briefly as a California-only operation on April 28th, then shut down again on May 9th. Apparently the SEC was not amused by Prosper’s aggressive moves (ignoring the SEC and launching under California State authority), because Prosper closed down lending on prosper.com, closed down their FixTheCreditCrisis.org site and video, and removed CEO Chris Larsen’s combative post from the Prosper blog.

In the post, Larsen had three specific complaints against the SEC. The first regarded auction pricing, which doesn’t look like it has changed in this revision. Either the SEC got comfortable with Prosper’s pricing model, or the issue related to the secondary market, known as the “Note Trader Platform” in the S-1 (although the description of that platform continues to include auction pricing).

Larsen’s second complaint was about loan pooling vs. investor visibility on a loan-by-loan basis. Presumably this was the issue that forced Prosper to remove the open market from its offering. One of Prosper’s arguments in their FixTheCreditCrisis.org site was that the old model of bulk-securitization and investment opacity was to blame for the credit crisis. The open market offered a new path forward, offering full visibility to debt purchasers because loans were sold individually and with full transparency to its underlying fundamentals, Prosper argued.

Prosper’s third complaint dealt with the listing and sales reports that the SEC had already required of Lending Club (whose filing was approved in October 2008), saying “requiring regulatory filings every other day of web site transactions that are already visible in real time, is redundant and cost prohibitive”. The SEC apparently did not agree, because the reports are included in their latest filing.

My only commentary is that it’s unfortunate that the SEC forced Prosper to remove the open market feature from their filing. It was an innovative concept that would have moved P2P lending ahead and opened up more business opportunities for Prosper and other peer to peer lenders. I wasn’t enamored with Prosper’s first open market partner, sub-prime auto lender CPS, but being able to launch with 100 loans from an actual 3rd party lender showed that there was interest from the marketplace, and interest from lenders (who placed plenty of bids before the listings were removed).

At this point it’s anyone’s guess how much longer Prosper will sit in quiet mode. Now that items are being removed from the S-1, however, it seems that SEC approval is near.

On May 13, erstwhile Canadian P2P lender IOU Central filed an S-1 registration statement with the U.S. SEC to issue $225 million in “borrower payment dependent notes”. As their VP of Marketing stated in an interview back in March, IOU Central has decided to focus on the American P2P lending market, after being shut down by Canadian regulators.

IOU Central’s registration largely mimicks S-1 filings from Lending Club and Prosper, with the following differences:

• IOU Central plans to use the Equifax Vantage Score for credit scoring, along with the Equifax Bankruptcy Navigator Index (BNI) for underwriting. This is the first time a peer lending outfit has publicly disclosed the use of BNI.
• IOU Central outlines fairly detailed borrower credit requirements, with a minimum 670 Vantage score requirement. Although Vantage and other FICO-like scores can’t be compared directly, 670 is a high “D” grade (on the Vantage A-F scale), which seems to put IOU Central in the “lenient” category compared to LendingClub, whose minimum FICO is 660, more like a low “B” grade.
• Borrowers will create listings, like they do on Prosper, but IOU Central will have the right to approve or decline listings depending on how likely the company thinks they are to be funded.
• Lenders bid on listings, but IOU has taken a laissez faire approach to the loan auction. After a lender has bid, the borrower must accept the lender’s bid in order for it to be committed. As a result, lenders may place more money in bids than exists in their IOU Central account; as bids are accepted by borrowers, other bids are immediately lowered or withdrawn so that lenders will not be overcommitted.
• The IOU Central auction is also mixed-price, in that lenders will participate at different note amounts and interest rates, as accepted by the borrower. There will be competitive bidding in the sense that the borrower will likely choose the lowest bid rates (and presumably higher bid rates that have already been accepted can be rejected and outbid), but IOU Central will not employ any kind of proxy or automatic rate reduction bidding.
• Loans will be available in 1, 2, and 3 year terms.
• IOU Central will charge borrowers a 2% loan origination fee, and lendes a 1% annual servicing fee. 
• IOU Central mentions that they are working to establish a secondary market for notes, but it does not seem to be part of the filing.

In the corporate financial section of the filing, IOU Central notes that through the end of 2008, the company has incurred expenses of $2.2 million. In 2009 they have received around $300k in angel funding, and have engaged with an investment bank to begin fundraising.

Interestingly, in the “Business Strengths” section of the filing, IOU Central states “We believe that our loan marketplace provides an efficient method of setting interest rates for registered users.” Although through their proposed approve/decline process for listings, IOU Central will likely start with better-priced listings, the auction mechanism and borrower-based price setting is actually quite inefficient, at least for lenders. Because lenders’ bids are accepted based on their lowest offering price, auctions on IOU Central will always favor the borrower and by definition be inefficient with lender funds.

In our interview with IOU Central, they hoped to begin lending this summer. Having filed in May and assuming the best-case scenario of 6 months to launch (which Lending Club achieved), chances are that IOU Central won’t be operational until the end of 2009, or possibly early 2010. In the meantime, the company is in a quiet period, and cannot comment.

Just two weeks after opening to California lenders, Prosper has shut down again, citing a renewed desire to complete their SEC registration. With their recent relaunch, Prosper had only been cleared by California state regulators.

I think Wiseclerk put it best when he wrote “What a mess.” It was disappointing enough that Prosper re-launched without SEC approval, but to now shut down so suddenly after re-opening raises serious concerns about the company’s viability. And now that Prosper is back in a quiet period, it’s impossible to tell what is really happening, and how soon (if at all) the company will be back.

It has been a little over six months since Prosper shut down its social lending marketplace under threat (and later consummation) of a cease and desist action from the SEC. Early this morning, the site was reopened after a weekend-long outage, with some expected differences but also many unexpected changes.

Regulatory Issues with SEC

Although Prosper will be open to borrowers from any state in the US (including South Dakota, which was previously closed), lenders are restricted to California residents only. According to a blog post by Prosper CEO Chris Larsen, it seems that Prosper has only been able to get clearance from the California Department of Corporations to issue securities to California investors.

Larsen doesn’t go into a lot of detail in his post, but his strongly-worded message includes the following screed that hints at what Prosper must be running up against with the SEC:

We remain hopeful that the SEC, which until now has effectively hamstrung the growth of the peer-to-peer and micro-lending industries in the U.S. will start applying the same common sense approach as California’s regulators. California has recognized that Internet auctions, just like the Google IPO, are the most efficient means of price discovery; that loan level transparency is better than the opaque loan pooling that brought the financial system to its knees; and that requiring regulatory filings every other day of web site transactions that are already visible in real time, is redundant and cost prohibitive.

There are three specific comments in there: 1) Prosper wants prices set by auction, 2) Prosper is opposed to loan pooling, and 3) Prosper is opposed to daily regulatory filings. Regarding auction pricing, Lending Club has always had a fixed-price model, so that is not an issue for them. And Lending Club has also submitted to daily regulatory filings (although, as Larsen says, they are redundant). Regarding loan pooling vs. loan-level transparency, it’s unclear what Prosper is arguing against.

Perhaps in an effort to frame its as yet unapproved bid to the SEC, Prosper is positioning the new site as a response to the global financial crisis. A press release issued this morning is entitled “Prosper Expands P2P Loans Marketplace in Response to Financial Crisis“, and the company has launched a site at FixTheCreditCrisis.org which encourages investors to contact their state legislators and help push through SEC approval for Prosper. It also includes this low-quality video featuring Larsen:

New brand: Prosper Loans Marketplace

Possibly one of the most visible (and puzzling) changes on the new Prosper site is a re-branding towards the name “Prosper Loans Marketplace”. The name is used in the site’s new logo and in a few other places, although the name of the company remains (according to the copyright) “Prosper Marketplace, Inc.” Few companies have been known to lengthen their company’s name, but Prosper seems to think that the Google juice earned by adding the word “loans” to their name will be worth the semantic confusion of having a plural noun sandwiched between two singular ones.

Open Market Loans

The biggest change on Prosper’s new site is the addition of what are called “open market loans”. According to Prosper, the open market is the lending market that takes place off-Prosper (i.e., loans that are underwritten and originated by traditional lenders). With the changes released today, these traditional lenders can start offering already-issued loans as securitized notes at auction to Prosper lenders (individuals).

At the moment, there are only open market loans available from CPS, an auto lending company. On an open market listing, in addition to the borrower’s Prosper Rating (more below) and credit profile, the loan’s payment history to date can be seen. This kind of professional underwriting and payment history data may attract a new kind of lender to P2P lending.

Secondary Market Still Pending Approval

Although it was the original stated reason for their shutdown, Prosper’s secondary market is not yet available, pending SEC approval. We know from their SEC filing that the marketplace will be operated by Folio Investing, but few other details are available.

Credit Grades are now Prosper Ratings

Before shutdown, the Prosper site scored borrowers by making a direct translation from their Experian credit score to his or her credit grade (e.g., a 700 credit score was a B credit grade). On the new site, a borrower’s “Prosper rating” is a combination of his or her credit score and a proprietary Prosper risk score that is based on historical performance. Although Prosper provides a help page on the Prosper score, they don’t actually publish the formula for determining a borrower’s Prosper score.

Prosper has also raised the minimum borrower credit score from 520 to 640, effectively blocking what were previously D, E, and HR credit grades from borrowing. Confusingly, the Prosper ratings look the same as the old Prosper credit grades. So although many high risk borrowers are cut out of the picture, their old labels (D, E, and HR) will be taken up by new, less-risky borrowers.

Other Changes

• Borrower loan closing fees raised from 2-3% to 3% across the board.
• Performance pages no longer include Estimated ROI, but rather emphasize the improved quality of borrowers with credit scores above 640.
• Collections statistics (which were removed before shutdown) are still not available.
• Some borrower listings appear to be 14-day listings. This may be a temporary change to allow the lower number of California lenders to bid on more listings, or a permanent change.
• Prosper has made changes to the lender account section that takes a more note-centered approach. Lenders can now see failed payment details, although other details have been removed at the note level.

This is an interesting and unexpected move on Prosper’s part. They are obviously unhappy with their treatment by the SEC, and rather than submitting to the SEC’s whim, they’re calling the SEC out, and hoping that the power of their constituency (the Prosper lenders) will persuade the SEC to approve their filing.

It will be interesting to see how this situation develops. Will Prosper take a state-by-state approach to investor regulation (the same way they approached borrower regulation pre-WebBank)? Or will the “Fix the Credit Crisis” mini-site eventually move the SEC to approve Prosper’s desired model?

Apparently, the third amendment’s the charm. Having filed a third amendment to its S-1 filing with the SEC just last week, Prosper has added a maintenance message to the header of its site, stating that the site will be offline all weekend for “system upgrades and configuration changes”.

This is probably an indication that Prosper is preparing their site to relaunch with the loan securitization model pioneered by Lending Club in 2008. Other expected changes include the introduction of “open market” loans (pre-funded by other originators) and  a secondary market offered through Folio Investing.

Aside from Lending Club and Pertuity Direct, who operates a mutual fund-like P2P lending model, a relaunch would make Prosper the 3rd active peer lending business in the US. Neither Loanio, who shut down shortly after Prosper last fall, nor IOU Central, who opened in Canada but then announced plans to open in the US, has even filed a registration statement with the SEC.