P2P Lending News

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bids than exists in their IOU Central account; as bids are accepted by borrowers, other bids are immediately lowered or withdrawn so that lenders will not be overcommitted.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.

After realizing that IOU Central is planning a launch in the United States, I reached out to Barry Coleman, the VP of Marketing for IOU Central to ask a few questions about their plans.

Thanks for taking the time to chat with us. Tell us a little about yourself and what you do at IOU Central.

I am the VP of Marketing for IOU Central Inc. (IOU Central). I officially joined the team in December 2008, but I acted as a consultant to IOU Central for several months prior. Most of my professional experience has been in the mortgage industry (sales & marketing). My front-seat view of the inefficiencies that helped create the collapse of the sub-prime mortgage industry is what excites me most about peer-to-peer lending. I like that we have an opportunity to seize control of borrowing & lending. Keep fees & costs low… and let borrowers & lenders take full advantage of true, market-driven rates… That is what peer-to-peer lending is all about.

What was the origin of IOU Central, the company?

We were incorporated in Delaware in August 2006 under the name IOU Central Inc. and as a wholly owned subsidiary of IOU Central Inc. (IOU Canada), a Canadian corporation, which had been formed two months prior.

How did you decide to first launch with a Canadian site (as opposed to a US site)?

Because there was no peer-to-peer lending operation in Canada, the management of IOU Canada decided to first launch its website in Canada. IOU Canada was the first company in Canada to offer peer-to-peer lending.

What regulatory issues did you run into in Canada?

Officials from Quebec’s Financial Markets Authority claimed that IOU Canada needed to register to deal in securities in order to operate its peer-to-peer lending business and accordingly requested that all new activity on the website be stopped.

Are you actively working on re-launching the Canadian site? Or are you focused primarily on the US site?

Currently, we are primarily focused on launching our US site. With regards to our Canadian operations, the management of IOU Canada is working with Quebec’s Financial Markets Authority in order to be able to offer peer-to-peer lending in Canada.

How is the regulatory environment in the United States different than Canada?

We believe the regulatory environments are somewhat similar.

Will you be following the same registration process that Lending Club completed?

Yes.

How long do you expect the SEC registration process to take?

We will not be able to commence live operation of our loan marketplace in the United States until we file our registration statement with the Securities and Exchange Commission (SEC) and until the registration statement is declared effective by the SEC. Based on current expectations, we plan to commence live operation of our loan marketplace this summer.

Your web site says “We are looking forward to releasing an online marketplace that will revolutionize peer-to-peer lending”. How will your site be different than existing P2P lending sites?

I don’t want to go into too much detail about our platform because we plan to file our registration statement with the SEC next month. With that said, I can say that we are confident our model takes positive aspects from many of our competitors. We like the true market aspect that bidding creates, and we like the security of only lending to qualified borrowers.

Aside from regulatory issues, what is the most challenging part of launching a social lending site?

The biggest challenge that I think faces our company and peer-to-peer lending in general is the ability to manage defaults. There are risks to investing in peer-to-peer loans. This is why we have designed a proprietary underwriting engine and credit-score grading system that allows only the most qualified, credit-worthy borrowers to post loans on our loan marketplace. Our approach is simple… only borrowers we would lend our personal money can post loans on our site.

The goals for your marketplace seem somewhat at odds: on one hand, you want tight control on underwriting, and on the other hand, you want market pricing. How do you see it?

We don’t think these desires contradict themselves at all. We are building a platform that will allow a true, open marketplace of qualified, credit-worthy borrowers. This creates a win-win for both borrowers and lenders. Lenders can have confidence in their investment with better borrowers, and borrowers will have the advantages of rates determined from our marketplace.

How are IOU Central’s operations funded? Have you raised funding from VCs, or another source?

IOU Canada was primarily funded by a group of angel investors.

How big is the IOU Central team? Where is everyone located?

Our corporate headquarters, which includes operations and most of the management team, are located just outside of Atlanta, GA. IOU Canada’s offices, which include most of R&D and technology, are located in Montreal, Quebec, Canada. The entire team is comprised of seven senior executives with experience that spans all facets of the business, plus several other employees and consultants.

It has been noted that Robert Bialek and Arkadiusz Hajduk, who originally co-founded FairRates in Denmark, joined your team before the original launch; how did that connection happen?

Our CEO, Phil Marleau, learned of FairRates and was impressed with the team’s technical expertise. After several discussions with Robert and Arkadiusz, Phil flew over to Copenhagen in the summer of 2007 to meet with the team. In the end, IOU Canada ended up acquiring their company.

Tell us something interesting or amusing about working at IOU Central.

I take great pride in working at IOU Central. Our entire team (including all contractors & consultants) has completely bought in to this concept. Peer-to-peer lending is a fascinating industry with an unlimited ceiling. Now, more than ever, is the perfect time to introduce this industry. With banks (and other lending institutions) tightening credit guidelines, it is very difficult to borrow money. On the other end of the spectrum, investors are having a hard time diversifying their portfolio with solid investment choices. IOU Central and peer-to-peer lending offers both.

IOU Central, the flash-in-a-pan P2P lending site from Canada that launched on Feb 13, 2008 and was promptly shut down on Feb 29 by Canadian regulators, has a message on the IOUCentral.com site (which is different than the IOUCentral.ca site they have used in the past) saying that they are filing with the SEC of the United States. The full (though brief) message is:

IOU Central is currently in the process of registering with the Securities and Exchange Commission (SEC). We are looking forward to releasing an online marketplace that will revolutionize peer-to-peer lending. See you soon!

Among other modest statements on the page, IOU Central also says:

 When the economy went quiet… IOU Central went to work!

The site promises to be back online in “Spring 2009″, but given the lengthy process that Lending Club went through with the SEC, I will be impressed if they can make good on that promise. A quick search through the SEC’s IDEA database reveals no filings by a company called “IOU Central”, so they must be in the planning stages. Interestingly, the Canadian site claims that they “hope to reopen soon”, but offer no estimated date for that event.

Only a few weeks after launching their web site, IOU Central shut down their web site on February 29  in response to a request from securities regulators in Quebec. A statement on the IOU Central site states: “IOU Central is now operating with limited functionality while we resolve a regulatory matter.”

However, only a few days later, on March 3, an official statement from the Autorité des Marches Financiers (AMF), the regulatory body that covers securities in Canada, included the following language:

At the request of the Autorité des marchés financiers (AMF), the Bureau de décision et de révision en valeurs mobilières (BDRVM) issued an order on February 27, 2008 against IOU Central Inc. (“IOU”) to cease any activity, directly, indirectly or by Internet, in respect of a transaction in a form of investment governed by the Securities Act (the “Act”), including any activity as a securities dealer. The BDRVM also ordered Philippe Marleau and all directors, officers, employees, representatives and mandataries of IOU to cease any activity in respect of a transaction in securities in a form of investment governed by the Act for and on behalf of IOU, including any activity as a securities dealer.

Microlending.ca has the full details of the Canadian government’s complaint against IOU Central. The complaint focuses on two facts:

1. The company falls under the jurisdiction of the AMF but did not register with the AMF, file a prospectus with the AMF, or solicit or receive authorization from the AMF to do business.
2. The company’s web site includes many references to “investing”, and “offers no financial guarantee”. These claims seem to subject the site to securities law, which requires AMF authorization.

Colin Henderson, the founder and CEO of the competitor site CommunityLend was quoted by the Toronto Star, saying ”it’s not really a surprise to us”. The regulatory issues that IOU Central has been facing are undoubtedly very familiar to Colin and his team, and explain in large part the continued delay on the launch of CommunityLend.com.

Canada’s IOU Central launched yesterday, becoming the first person to person lending site in the great white north. CommunityLend, which had made their intention to launch public months before, is still sitting on the sidelines working out regulatory issues.

On the IOU Central site, borrowers can request loans between $1,000 and $25,000 (Canadian dollars), along with the minimum they will accept should the loan not get 100% funded. Listings last 2 weeks, and the borrower can choose the loan term, between 1 and 36 months. Borrowers pay IOU Central an origination fee based on their credit score, which is determined by TransUnion Canada.

Interest rates are set in a Prosper-style auction, and lenders bid as little as $25 for the privilege of participating in a borrower’s loan.

As Netbanker has noted, the VP of Technology and the Product Manager at IOU Central were previously the founders of the Danish P2P lending firm FairRates, presumably acquired through some kind of merger or acquisition, although none has been announced.