Lazy Man and Money

Prosper is Dead

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Just a few hours after I received an e-mail from Lending Club announcing that they were open again, Prosper sent an e-mail saying that they were beginning their quiet period. This is just over 6 months after Lending Club entered it’s quiet period. I believe that Lending Club got out of it’s quiet period quickly due to a partnership with an existing broker member, FolioFn. It doesn’t sound hard to believe that Prosper will go quiet for another 6 months.

The quiet period sounds a lot like Lending Clubs. There’s not much indication how long it will take, but the indication is several months. During this time lenders won’t be able to lend and people won’t be able to sign up as lenders in the meantime.

Regular readers may note that the title to this post is a tongue-in-cheek reference to my previous post Lending Club is Dead. In honesty, I think that Prosper’s huge first mover advantage over other peer-to-peer lending platforms, gives me more confidence that they can weather this storm than Lending Club did. In addition, we’ve seen Lending Club come through and resume business, so there’s hope that Prosper can duplicate those results.

I feel that people should be asking a very important question here. Why is the SEC focusing on Prosper and Lending Club? Is it for consumer protection? Where was this regulation and scrutiny when banks were making mortgages so bad that a 3rd grader could realize the problem? Where were they when these CDOs we being created? While Americans lose more than a trillion dollars (between stock losses and bail out packages), the regulators are focusing on the small amounts of money the Prosper and Lending Club service. In the immortal words of Seth and Amy from Saturday Night Live, “REALLY?!?!”

Lending Club Opens For Business Again

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Lending Club has opened for business again. They come back with a partnership from FOLIOfn. This partnership, as I understand it (and I could be wrong here), seems to have sped up their process with the SEC. It also allows them to have a secondary market – a place where you can sell loans to other lenders. This provides important liquidity to the peer-to-peer marketplace.

So it appears that I was wrong when I said, Lending Club is dead. Still, any time a start-up shuts down a large part of their business and doesn’t explain why, it couldn’t be considered a good thing. I stand behind that – even if my title was a little sensationalist.

For a long time I considered Lending Club the smaller player to Prosper. It started later. It has less money in loans. The tools for finding loans lack the flexibility of Prospers. The reporting tools could be better and I’m not sure their API is nearly as advanced as Prosper. However, it seems like for the first time, Lending Club has hit Prosper where it hurts – especially as Prosper enters it’s quiet period.

On a personal level, I’m excited to see Lending Club back in gear. I have 60 loans with them and 59 of them are current or paid off. The one outlier is between 16 and 30 days late and has paid off 20% of that loan so far. It would be hard for me to call that borrower a deadbeat at this stage. Looking at the Lending Club statistics, it seems like people are as likely to pre-pay their loans as being late – though a great percentage are current as you’d hope they’d be.

Peer-to-peer lending has gotten a lot more exciting lately.

Lending Club is Dead

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[Update: It looks rumors of Lending Club’s death was premature. It was actually my best investment last year. You can sign up at Lending Club.]

lendingclubrip.jpgI, like many other Lending Club members, received a distressing e-mail a couple of days ago (Lending Club Reviewed). I waited until now to sort out how I feel about things. Here are the highlights that I found interesting:

Lending Club 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. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders… The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club… Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

In other words, they are shutting down the peer-lending service. They either are not willing to or unable to explain in more detail how long this may go for. The part about Lending Club fulfilling all borrow loans themselves is concerning. What happens if people don’t pay them back, will the company go out of business? Will they have to fill every borrower’s request that comes to their door? If not, how do they choose who to fund?

The biggest question is, “How long will everyone be in limbo?” Tech Crunch suggests that they might need to obtain a broker-dealer license from the SEC that would legitimize its operations. If this is the case, it might be quite a few months. You don’t just get a broker-dealer license from the Dollar Menu. There are regulations on top of regulations.

I am incredibly disappointed by this news. I ran a contest less than two weeks ago and gave away Lending Club memberships with $50 just for signing up. I will be pulling my money out as fast as possible. It makes no sense to leave it there since you can’t lend it and it earns no interest.

I have been worked for a number of start-up companies and they had one thing in common – they are extremely fragile. A high percentage of new companies fail. Often times they do everything right and the market conditions or something else just isn’t right. In this case it looks like Lending Club has the right market conditions, but something internally just isn’t right. I’ve talked to a few other Lending Club members – smart members who probably could have helped Lending Club avoid this problem in the first place – and they said they are gone and never coming back. They feel their trust has been violated. With each day that Lending Club can’t or doesn’t say anything to justify this inactivity, the more trust is lost. I might be blowing this out of proportion, but I’d rather err to the side of being conservative until I have reason to believe otherwise.

Note: I don’t believe this affects Prosper.com. The lenders do have promissory notes from the borrowers. Furthermore, Prosper has filed with the SEC for a loan resale marketplace, which tells me they are cooperating with the SEC’s requirements.