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Roundup of Social Lending News – January 28, 2012

by Peter Renton on January 28, 2012

Every Saturday I bring you the latest news from the world of peer to peer lending. These are the best of the news articles and blog posts from around the web that I shared on Twitter this past week.

We have an interesting cross section of articles this week. I would like to highlight the Prosper review by Wealth Pilgrim – I think that is the most detailed review of Prosper that I have read. Another  interesting one was the Reuter’s blog post on the regulatory history of Lending Club and Prosper. While the historical account is not 100% accurate, there are some interesting ideas about the future regulatory environment for p2p lending. Enjoy your weekend.

Money Q&A - Lending Club Waives Service Fees On Large Loans

P2P Banking (UK) - How Do the Efforts of Prosper and Lending Club in Search Engine Marketing Compare?

Prosper blog - Independent Audit Confirms Prosper’s Industry-Best Returns

Reuters Financial Regulatory Reform blog - Peer to peer lending: the murky future with America’s new consumer protector

Smart Peer Lending - Lending Club Strategy Challenge

This is Money (UK) - Beware the lure of web savings and lending sites after a rise in borrowers failing to repay debts

NY1.com - Peer-To-Peer Lending Can Help Investors’ Accounts Grow

Small Business Trends - 8 Ways to Finance Your Startup with Debt: Part 2

Bloomberg - Programmers Size Up Bank Borrowers With Algorithms Rather Than FICO Scores

Wealth Pilgrim - Prosper Review – Should You Take the Social Lending Plunge?

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{ 25 comments… read them below or add one }

Roy S January 28, 2012 at 5:04 pm

Re: Programmers Size Up…

“When customers apply for a loan, they agree to let the company look into their checking account to analyze money flow. The company’s software looks at bill payment history, plots debits and credits, and determines the likelihood of a timely repayment.”

This is a very personal and in-depth look into a person’s financial personality. From the lender’s perspective, I can see how they can use this information to better gauge risk than the FICO scores put out by Fair Isaac. From a borrower’s perspective, though, this may be a little too personal. You want a loan from us? First we need to perform a prostate exam…

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PeerLend January 28, 2012 at 6:28 pm

Yup. That’s certainly an invasive and not very well-considered way to gauge risk – though I’m sure it’s quite wonderfully predictive. Marissa Mayer of Google gained some attention (and a few tilts of the head and raises of the eyebrows, from people who think of long term implications of such surrendering of privacy) some years back when she made a comment, in public, that Goog could look at a househould’s credit card purchase history and predict a divorce (within something like the next 2 years) at 98% accuracy.

Thanks but no thanks! Perhaps it’s time to hire some Ph.D.’s from non-technical fields (who’d see how creepy it is – and smack/talk some sense into that mis-guided gang of engineers). “Back to the drawing boards…”

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Dan B January 28, 2012 at 7:49 pm

Yeah I’ve heard that as well. The dynamics of relationships are pretty predictable. But I can top that. How about I say that one can predict with 95% accuracy whether a teen couple who has an out of wedlock kid will still be together in 2 yrs…………….without looking at any spending patterns or anything else………………..just with that one piece of information. If you say no then you’ll be correct 95% of the time.

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Dan B January 28, 2012 at 7:50 pm

That is “no”, they won’t be together after 2 yrs………. then you’d be correct 95% of the time.

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Dan B January 28, 2012 at 7:53 pm

Peter……………Re the Reuters article, didn’t the SEC in fact close Prosper down on 2 separate occasions?

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Roy S January 29, 2012 at 11:44 am

@PeerLend, If the borrowers are okay with this set-up, I really don’t see anything wrong with it. I agree, it is a little too creepy for me as well. But if a borrower can only get a loan this way or they can get a loan for a few percentage points lower, then it can be a very beneficial service to those who aren’t as creeped out by it…or at least to those who can’t afford to be creeped out by it.

The big issue I see with this set-up is that there is a large group of people in the US who still don’t even have a bank account. I don’t know how payday loans work, but if they don’t require you having a checking then I don’t see how this option would be able to replace (or even become a big player) in the payday loan market. I think you’re talking about 15 – 20 million Americans and an untold number of illegal immigrants who do not have a checking account.

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Peter Renton January 29, 2012 at 4:57 pm

@Roy, I think you hit the nail on the head when you said that “those who can’t afford to be creeped out by it”. BillFloat, which the company the Bloomberg article is referring to here, is for people who can’t afford to pay their monthly bills – so anyone applying there is clearly under some financial distress.

@Dan, No. Prosper closed down voluntarily and then a month later the SEC issued a cease and desist order effectively shutting them down. But they were already shut down so it had no practical effort.

@Peerlend, Every credit card company, no to mention companies like Mint, have more information on people than ever before. There are all kinds of things they know about people (far beyond marriage infidelity) that could certainly concern reasonable people.

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Dan B January 29, 2012 at 10:03 pm

Peter………..I thought that there were in fact 2 cease & desist orders issued to Prosper. The one you referred to & then the second one 6 or 7 months after they were initially closed………….. when they re-opened prior to getting all their crap in order.

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Peter Renton January 30, 2012 at 3:19 am

@Dan, You are probably referring to the time when Prosper reopened briefly to California lenders in 2009 while they were in their quiet period. They only stayed open for a couple of weeks and my understanding is that they closed voluntarily. Here is how Wiseclerk reported on it at the time:
http://www.wiseclerk.com/group-news/services/prosper-breaking-news-prosper-closes-again/

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Glenn G. Millar January 30, 2012 at 11:24 am

Dan – There is no truth to your question/statement that Prosper’s shutdown was anything but voluntary. Prosper voluntarily shut down on all occasions. I’m sure having all the facts is important to you as a current and ongoing Prosper investor. Thank you for your continuing purchase of Prosper notes.

Glenn G. Millar
Prosper Employee

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Dan B January 30, 2012 at 2:54 pm

Glenn………….Your definition/interpretation of the terms “voluntary” & “cease & desist” sends chills down my spine. Thankfully, since I’m no longer purchasing Prosper notes, I won’t have to deal with these “imaginative” interpretations much longer.

For the official interpretation of the events & timeline one need only look at pages 23-25 of the GAO report from March 2011 here
http://www.gao.gov/new.items/d11613.pdf

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Glenn G. Millar January 30, 2012 at 3:12 pm

Dan -

We are glad that investing in Prosper notes was profitable for you, but it also sounds like, based on your feelings, you are making a good decision at this time. We wish you the best in your future endeavors.

Glenn G. Millar
Prosper Employee

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Peter Renton January 30, 2012 at 4:52 pm

@Dan, When one reads the GAO report there is no suggestion whatsoever that Prosper, or Lending Club for that matter, did anything wrong. There was a disagreement in how they should be regulated but both companies begrudgingly went through the SEC registration process when it became clear there was no alternative. But I know when you speak to the leaders of both companies they still disagree with the government’s interpretation of the laws.

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Roy S January 30, 2012 at 5:16 pm

@Dan, From everything I have read, it sounded like Prosper did enter both quiet periods voluntarily, or rather re-entered the same quiet period. I don’t see anything on that GAO report that indicates two cease and desist orders. The only one came in November, but Prosper had already entered their quiet period Oct 15th.

As for the two weeks that Prosper was open for CA only, here is a wsj article you might be interested in: http://blogs.wsj.com/wallet/2009/05/12/why-prospercom-halted-new-loans-again/ . It does make it sound like the SEC may have told Prosper to shut down again unofficially with no real cease and desist order–something to the effect of “We’ll hold off on issuing your final approval if you don’t shut down again.” But any intentional circumvention of the SEC by Prosper or official cease and desist order from the SEC are not to be found.

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Dan B January 30, 2012 at 7:55 pm

Ok, 2 guys are in a room. The 1st guy pulls out a gun & orders the 2nd guy to lie down on the floor & that he has 10 seconds to comply. The 2nd guy thinks about it & lays down on the floor.

Some people would argue that the 2nd guy complied under duress & that it was certainly not voluntary. Other people might argue that the 2nd guy didn’t put up a fight, therefore he”voluntarily” complied after pondering his options. Prosper seems to be asking us to believe that not only was it voluntary, but that it was the 2nd guy’s idea to lie down in the first place. :)

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Peter Renton January 30, 2012 at 9:37 pm

@Dan, You have made your point (as well as your dislike for Prosper) crystal clear. I have heard that Prosper considered fighting the SEC on this but decided against it. And so I can see why internally they would view their shutdown as voluntary. The other option was an expensive and drawn out lawsuit that would have had an uncertain outcome. At least with the SEC registration route they had the precedent of Lending Club successfully completing it.

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Dan B January 30, 2012 at 11:51 pm

Oh, I agree that fighting the SEC wouldn’t have been a good idea. But tell me, if all the actions were so “voluntary” then how is it that Prosper didn’t go into their quiet period until after Lending Club exited theirs? You’d think it’d be the other way round wouldn’t you? I mean after all Prosper’s been around a bit longer, correct? I’m shocked they didn’t have lawyers camped out at the SEC demanding that they’d be allowed to “voluntarily” comply. :)

Who knows, it might have even saved them from all that unpleasant business like getting sued by pissed off lenders.

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Roy S January 31, 2012 at 7:54 am

@Dan, Would you go through a field knowing there could be landmines? Or would you wait until someone else went first? What if LC had not been given approval from the SEC?

I think the issue you have is that they used the word “voluntarily.” The government tells us we voluntarily choose to pay our taxes every year. Of course, if I chose not to, the government would still find a way to get the money they want to extract from me. So instead of trying to fight the IRS or have them attempt to put me in jail or garnish my wages, I allow them to keep me in servitude for one in five of my working days rather than 7 days a week. Is it voluntary to follow their rules? Yes. Would they enforce if it I chose not to voluntarily comply with them? Yes.

With p2p being such a new industry, it was understandable that Prosper and LC would not know all the legalities behind, mainly because it was new and innovative and there weren’t very many regulations surrounding it. The lack of rules and regulations happens when people and companies are new and innovative–hence the word “new.” So, it wasn’t like they were trying to avoid paying their taxes knowing full well they were breaking the law. There just weren’t any laws that specifically applied in their situation because this specific situation hadn’t arisen yet. And, really, when it comes down to it, I don’t see any other company doing or stating anything different if the same situation were to apply to them (i.e. they would voluntarily comply with the laws and do what the government asks them to do).

Of all the reason to be upset with or criticize Prosper over, this is…I hate to say it, but…this is a little ridiculous. It is really rather minor and is hardly unique. Just my humble opinion…

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Charlie H January 31, 2012 at 10:47 am

“The big issue I see with this set-up is that there is a large group of people in the US who still don’t even have a bank account. I don’t know how payday loans work, but if they don’t require you having a checking then I don’t see how this option would be able to replace (or even become a big player) in the payday loan market. I think you’re talking about 15 – 20 million Americans and an untold number of illegal immigrants who do not have a checking account.”

The shadow banking system is something that does not get talked about enough.

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Glenn G. Millar January 31, 2012 at 11:04 am

Might we all agree that both Prosper and Lending Club are now regulated by the SEC, both with good track records since coming out of their quiet periods. Both companies have demonstrated that the peer-t0-peer lending market is viable, growing rapidly and potentially highly profitable. In other words, let’s agree to disagree about a past that was over 3 years ago and move on to arguing about the future. ;)

(We can’t change the past, but we are always listening to your suggestions to give us the best future possible.)

Glenn G. Millar
Prosper Employee

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Peter Renton January 31, 2012 at 1:09 pm

@Roy, Well said. Everything looks obvious with the benefit of 20-20 hindsight but at the time there was real doubt that both Lending Club and Prosper would survive SEC regulation. The good news is they both have and are growing rapidly. As Glenn says, let’s move on to arguing about the future.

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Dan B January 31, 2012 at 1:58 pm

Glenn…………Interesting argument. Was that the same argument used by your lawyers to try to get the lawsuit dismissed? How did that work out? :) Please enlighten us about the “future” as it relates to that issue.

You know, as shocking as it might not sound, I’ve been annoyed at a few companies in my life. However, I’ve never been annoyed enough to actually sue them. Someone must have done a real good job at pissing people off huh? Or are you not allowed to comment on pending litigation?

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Glenn G. Millar January 31, 2012 at 2:08 pm

Dan – I didn’t make an argument. I was just expressing that arguing about the past serves little purpose unless it is used to change the future.

My role in participating in forums is to help people understand our site and listen to interested parties to improve on the user-experience.

If you see something with Prosper.com that you don’t like right now, please let me know and we’ll see if we can’t fix it or at least answer your concern.

Glenn G. Millar
Prosper Employee

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Dan B January 31, 2012 at 2:39 pm

Glenn………Congrats! I hear that Prosper set a new record for the most originations EVER this month.

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Glenn G. Millar January 31, 2012 at 2:49 pm

@Dan – That is correct. Thanks for noticing. We did $10.8 million in loan originations, up 14% from December and up 600% vs. year ago, and just topped the $300,000,000 in total loans originated. (And yes, we are not as big as the other guys . . . yet.)

Glenn G. Millar
Prosper Employee

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