Lazy Man and Money

Prosper and Loanio Updates

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This news is a week old, but I’ve been a little too busy to get it out. It seems like the SEC ordered a cease and desist. I have to admit that reading the legalese is not my specialty. So I don’t really know what it amounts to. If anyone wants to read it and interpret it for me, I’d appreciate it.

That’s not the only bad news for Prosper. Monday Prosper agreed to pay 20 states $1 million dollars. It seems you can follow the progress of this class action lawsuit on this blog.

In other news, Loanio has voluntarily decided to stop accepting lenders and borrowers. Presumably they’ve seen what’s going on with Prosper and what Lending Club has been through. This is why Zopa didn’t operate a pure P2P.

Sometimes I wish the US regulators that are going so hard after these P2P companies would spend more time preventing and fixing the economy.

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?!?!”

Prosper Borrowers: Buy My Endorsement For A Better Loan Rate

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Note to Reader: I intended the following to be a piece of satire in the same idea of Jonathan Swift’s A Modest Proposal. Since I’ve written about 17 million words being a Prosper “fan boy”, I thought it would be fairly obvious that I wouldn’t hurt the marketplace by actually selling my endorsement. From the comments, it seems as if I was wrong. I wanted to make Prosper aware of the issue while trying to advance my writing skills.

I had another goal as well, I hoped people would pick up on the debate of social capital having monetary value vs. money being able to buy social capital. Seth Gitter, Assistant Professor of Economics, says the concept may make an excellent economics paper. You’ll want the read the last paragraph of that post where he mentioned that Michael Jordan’s paid endorsement for Nike is very similar. This is the kind of valuable discussion I wanted to explore. And now for the unedited article:

As some of you know, I’ve been lending money on Prosper since February 2006. I’ve been intrigued by P2P lending for at least these two reasons:

  1. It makes available an asset class not heavily correlated with stocks, real estate, or commodities
  2. It provides an opportunity for a more efficient marketplace for loans by opening it up to everyone

Some people disagree with these statements. That’s fine, there’s definitely some room for discussion on either side of the fence.

When I went to Prosper Days to learn more about Prosper, one of biggest things the company talked about was social capital. There’s real value to connections that can be financially rewarding. As cold and heartless as that sounds it’s true. I’m not saying that social aspects are not worth it alone, but if there’s a bonus of a financial reward for both parties, why not take advantage of that?

Prosper found out some interesting things when they allowed friends to endorse loans. Netbanker recaps in more detail, but here’s the executive summary. Lenders realize that borrowers don’t want to let their friends who endorsed them down and thus see them as a better risk for their dollar. Specifically:

  • Loans with one bidding endorsement are performing 35% better than similar loans without that endorsement
  • Loans with more than one multiple bidding endorsement are performing 50% better

Using this information, it becomes clear that borrowers have a lot to gain by getting an endorsement from a bidder. One could reason that the higher the bid the stronger the endorsement. So a borrower could get an endorsement by trying to get a friend to sign up for Prosper as a lender, but many friends aren’t going to be willing to go through all the trouble of opening an account and giving up their social security number to yet another financial institution.

Buy My Endorsement

Another way to get an endorsement is through me. It’s pretty simple really. Contact me and let me know how much you want your endorsement for. Give me that money plus 50% and I’ll bid on your loan. If you end up paying off your loan, I will return the value of your endorsement. The 50% extra is my fee for making your loan more attractive to lenders. This gives you a better interest rate which usually would be worth much more than my fee. Here’s an example: You want a $50 endorsement on your loan. You contact me, we talk, and you send me $75 through PayPal. I bid $50 of that money on your loan with an endorsement and keep $25 for my time. If you make good on your loan and pay it off on time, I’ll give you the $50 endorsement value back. If you default, I keep the $50 (this protects me from potentially losing on the loan). With the endorsement your interest rate may go down 3% (hypothetical example), which over three years, should add up to more than the $25 fee I’m requesting for this service. You’ll want to do the math to make sure that it makes sense for your loan.

Why Am I Doing this?
If you think it sounds dirty, you are right. I’m putting on a grey hat in this case. I want to see how Prosper reacts to such a proposal. They’ve blurred the line by adding the social element to the loan marketplace. I want to blur it more. I want Prosper to look at endorsements and say, “Is this really the right model? Can we make it better?” Innovation occurs when  a potential problem is exposed. Perhaps “buying an endorsement” doesn’t qualify as a problem in Prosper’s eyes. If that’s the case, that’s worth knowing as well.

Lastly, I think it’s a great way to demonstrate the power of social capital. A smart borrower gains with a lower interest rate. A lender (I won’t call myself smart) gains with a unique idea. If there’s a bonus of a financial reward for both parties, why not take advantage of that?

Lending Club Update

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While I was asleep at the wheel on Friday, Lending Club came through with an update on their quiet period. When we last left them, I declared Lending Club is Dead. I admit that I was going for a sensational headline, but I still maintain that I wasn’t irrational. When a start-up company says that it is A) Unable to take new business, B) Unable to talk about why it can’t new business, and C) Unable to give a time-line for when business with resume, you have to wonder.

On Friday we learned that Lending Club Filed For SEC Registration. I didn’t see a hint of how long something typically waits to get through the SEC, so I’m going to be really conservative and go with a ballpark estimate of 14 years. (Again I’m being ridiculous, but with the last of information, that’s what I’m reduced to.)

I really like Lending Club – my loans are for the most part current. I say “for the most part” because I don’t want to jinx anything. It’s a little like how you don’t mention the no hitter when a pitcher hasn’t given up a hit for the first 7 innings. My portfolio at Lending Club is doing better than it was at Prosper. In fairness I took too much risk with Prosper, so by the time Lending Club came around, I was a good deal smarter about my loans.

Let’s hope that the SEC puts a rush on things to keep the industry moving. Without competition (Loanio, Loanio, come out wherever you are, the P2P lending space has been boring.

Carnival of P2P Lending #9 – Cinco de Mayo Edition

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Happy Cinco de Mayo! In a few hours from now I’ll be having tacos and maybe a cerveza. I draw the line at doing a hat dance. Grab yourself some nachos and chew on these articles about P2P lending…

Moolanomy spectulates why Lending Club has stopped taking new lenders. Interesting thought that “If they are successful, I believe they will emerge as the industry leader.” I think Prosper already has a head start on Lending Club, so I think they’ll just emerge as a stronger #2 than before.

Not to be outdone, Cash Money Life speculates on the future of Lending Club.

Prosper Lending Review tells you how you can buy your own P2P Lending company. I’m guessing that it’s not going to come cheap.  I wonder if my credit score is good enough to get a loan on Prosper to buy it – just kidding.
Wiseclerk covers the launch of Cashare in Switzerland. It’s similar to Prosper except that you have to submit paperwork for each loan.

The Prosper Blog notes the value in social capital in getting a loan funded. I’ve got more to say about this in the future – perhaps later this week.

RateLadder says that with the Fed dropping interest rates, buy a Zopa CD. It seems like you might even be able pay your loan back at negative percent if you can convince people to help you.