Your guide to peer to peer lending

A Huge Month for U.S. Peer to Peer Lenders

by Peter Renton on August 31, 2011

There are no summer doldrums when it comes to p2p lending. The wildly gyrating stock market as well as a turbulent bond market where fixed income yields keep dropping contributed to a huge month for Lending Club and Prosper. Both companies saw big increases in their monthly loan volume with double digit percentage increases over the previous month.

Lending Club’s August P2P Loan Volume Over $23 Million

Let’s start with Lending Club where loan volumes jumped from $20.6 million in July to $23.0 million in August. The typical last day bounce (when much of the institutional money is invested) was a bit lower this month – about $2.9 million by my calculations. This is well below the $5,7 million that came in on the last day of July. But the month as a whole was so strong they didn’t need a huge last day to break any records.

Here is the chart for Lending Club’s loan volume over the last 18 months. The black line is the three month moving average.

Lending Club P2P Loan Volume

I emailed Lending Club to get some comments about the great month they had and this is what Scott Sanborn, Chief Marketing Officer had to say:

We have seen a historic inflow of investment capital this month – more than 2x our previous record – driven both by new investors joining the platform and existing investors significantly increasing the size of their accounts. Professional, fixed income investors have cited Lending Club as a great alternative given the dreary outlook for bonds and the Feds announced intention to keep rates low. Retail investors have told us that they appreciate the stability of Lending Club vs. the roller coaster ride that the equities market is continuing to deliver.

Prosper’s P2P Loan Volume up 14% in August

Over at Prosper they also continued their steady climb in loan volume. August marked their 12th month in a row of increasing loan volumes and as you can see in the chart below August saw a big jump over previous months. This was helped along by their largest investor, Worth-blanket2, who kicked in around $1.8 million in new money bringing their total to just over $5 million since coming on board in May. What was also gratifying to see was several other investors (Reflective-rupee, Scrappy-diversification7 and Capital-halo1) contributing over $100,000 in new money in August according to Lendstats.

Below is Prosper’s chart for the last 18 months that shows the rapid growth they have experienced since the start of the year.

Chart of Prosper's P2P Loan Volume

When I contacted Prosper for some comments about their stellar month this is what Joseph Toms, Chief Investment Officer had to say:

We continue to see investors responding to our industry-leading risk adjusted returns of 10.6%. This month was another record month driven by institutions discovering Prosper – and this pipeline continues to grow nicely. We had a 14% increase in total loan volume ($) and a 17% increase in number of loans funded. Equally important, our investors are maintaining a conservative posture by focusing nearly 80% of their money in 1 and 3–year maturity paper.

It will be interesting to see if this increased volume can be maintained in September which is a holiday shortened month. We are probably overdue for a break in this rapid growth but we will see.

{ 29 comments… read them below or add one }

Dan B August 31, 2011 at 9:02 pm

So the Chief Investment Officer at Prosper would characterize lending money for 3 years at 27-30% to people who can’t get a loan anywhere else outside a payday outfit………..to be part of a “conservative posture”? That’s an interesting way to put it. What would be a risky posture? What was this man’s previous job? Slots manager at a Las Vegas casino?

And if that wasn’t silly enough nonsense………..
How exactly was this month another “record month” at Prosper? What record would that be exactly?

Dan B August 31, 2011 at 9:09 pm

Peter……..Part of the infamous last day surge at LC will be kicked over to tomorrow, September 1st. So instead of the couple of hundred thousand per day we’ve seen for the first few days of each previous months, you’ll see a couple of million funded by this weekend. You heard it here first.

Shawn August 31, 2011 at 10:08 pm

Call me silly, but isn’t it too early to write this article with the month in question not even over yet and without final numbers in? Granted they posted increases no matter what, but if mentioning ‘final day push’ then might want the final day actually accounted for…? Either way, it’s good for the P2P market.

~Shawn
Prosper lender “shawnw2″

Dan B August 31, 2011 at 10:42 pm

Shawn……….Ok I’ll grant your wish of being called silly. Well that’s not entirely fair because your comments would be rather astute…………….if either company actually waited until midnight to tally the final numbers for the month. They of course don’t, & haven’t done so in the many months that I’ve been following this.

PeerLend August 31, 2011 at 11:02 pm

Let’s say I write a “cook-book”. I take this book to a bank or hedgefund, and they like the idea of the book (which is “keep buying books I issue”) – and they keep making “advances” – to keep printing books to sell people – except, due to a structural finance trick, I’m able to put up the books I’ve already sold, but technically still own, as collateral for such “advances” – and use some portion of such “advances” to buy more of my cook books, keeping my numbers growing, so that it remains on the “best-seller” list.

Q: Who’s currently playing (and who is being played) by this cook-book?
A: The only answer I’ve seen is recent amendment to LC’s SEC “op-risk”.

I noticed some questions after Prosper’s webinar about why – on op-risk – Prosper kept referring to the fact that it’s “debt free”. Howsabout the LC?

Next, in your last post, you and others were discussing LC’s NAR calc wrt how it takes into account “new” loans (a practice called “speedboating”) – which artificially inflate the return figure presented on such “book cover”.

(I therefore differ over whether LC can afford an “overdue growth break”, though I do not differ over whether such is, indeed, “overdue” – in Truth.)

So – morally hazardous issues which pop into my mind completely aside – and with all due (and diligent) deference to Charles Ponzi – have you any sense of what I’m talking about – without me talking about it, in English?

There was an excellent thread, on some blog which I forget, where Zopa, CommunityLend and a couple of the European P2P peeps addressed the matter of whether a P2P entity should have “skin in the p2p game” – buy their own loans or some percentage thereof. Investors, who were asking such questions, thought it would serve an incentive alignment function – though, for some very good reasons, all the “insiders”, from the P2P co’s, were making some very rational/ethical arguments against such trading.

I suppose it works out, in the end, one way or another – but I think those people inside, who were discussing it, were afraid of what failure to scale would do to the industry as a whole, if it were to occur during its infancy, and some sort of catastrophic/cascading/contagious failure ruined P2P…

I think P2P’s still in its infancy, but I’m not calling social services, on LC, though I won’t be letting my kid$ go over to their house to “play”, either.

Not enough adult supervision for me to feel comfortable, at the moment.

Dan B September 1, 2011 at 9:30 am

Peerlend………….Wow, I see you’re going out of your way to endear yourself to the US p2p companies. :) Good luck with that.

Peter Renton September 1, 2011 at 9:54 am

@Dan, My guess is that Joseph Toms at Prosper was referring to the fact that five year loans are more risky than one or three year loans and that Prosper has a far smaller percentage of these five year loans than Lending Club. And you may be right that there will be a carry over of the surge in funds early this month. I haven’t quizzed them yet as to why the last day surge was smaller than usual. Let’s see how it plays out.

@Shawn, I always make sure the month has been officially closed before I publish my charts. With Prosper it is easy, they only update their loan numbers once a day, early in the morning. But at Lending Club they post updates to their numbers throughout the day. So in the late afternoon on the last day of the month I always call Lending Club to get confirmation that they have closed out their month before I publish my post. I would never publish these graphs if I wasn’t 100% certain they were accurate.

@Peerlend, So, if I can understand you correctly (and I may not) you are implying that Lending Club and Prosper have something in common with a Bernie Madoff-style Ponzi scheme? I certainly take issue with that statement – I see no evidence whatsoever to support that.

As for Lending Club and Prosper having skin in the game, I presume you do realize that they in fact do fund some of their own loans. While not a part of every loan you can see for yourself on Prosper that the screen name ChrisProsper has been actively funding loans in recent months to the tune of $600K over 433 loans just this year. On Lending Club they have funded their own loans from time to time although my research indicates that has slowed down in recent months.

Dan B September 1, 2011 at 10:04 am

Peerlend………..As much as I have an aversion to agreeing with Peter I’m going to do so this time.

Peter Renton September 1, 2011 at 10:08 am

@Dan, I just fell off my chair….

Dan B September 1, 2011 at 5:30 pm

Peter……..Well I don’t plan on making it a habit. Please understand that I don’t necessarily disagree with 90% of what Peerlend said, nor do I believe that he made a direct comparison to a Ponzi scheme. Nevertheless I think that part could have been left out because it diluted his message , especially given that clearly p2p IS NOT a Ponzi scheme.

Peter Renton September 1, 2011 at 6:08 pm

@Dan, Thanks for the clarification. I hope you continue to disagree with me on a regular basis – it keeps me on my toes. And I think @Peerlend raised some valid points, too.

PeerLend September 2, 2011 at 12:36 am

Ah. No, P2P is not a ponzi scheme. You’re right – I should have left that little mental tangent out – but I am “on my toes” for such things, lately…

Anyway, my primary issue with LC (and, for that matter, SEC) is one on: leverage being taken on at the platform level thereby exposing investors.

I don’t care if individuals from LC or Prosper or any P2P platform invest into their own products (assuming no informational advantages) – but, I certainly care whether a platform is, as a platform, levering up to invest.

Such situations have potentially catastrophic implications for the “little guy” – who doesn’t know he doesn’t own the loans, and is 99th in line if some platform overextends itself on his dime, fails to scale, and… bang.

Mostly, I blame the SEC for even allowing this to be a possibility – were loans still owned by lenders, rather than entities, leverage is not (much) concern given that if a lending company overextended, it’s not my dime.

My read (or “hear”) of the Prosper webinar responses to the op-risk Q’s, where they emphasized that they were “debt free”, is that it was a subtle distancing of their operations (and risk management) from those of LC.

And I see why they would want to do that – much the way that I saw LC distancing itself from Prosper, on the returns issue, back in 2009 or so, though that worm has turned, as well – as Prosper’s risk mgmt scaled…

Anyway – nice convos here – thanks!

Dan B September 2, 2011 at 2:56 am

Peerlend…………The more I read what you’re writing the more I’m beginning to wonder what exactly is your agenda.

For starters let me point that you’re not the first or the tenth person to point out that these notes aren’t owned by us directly. I’ve been talking about this issue on & off for over a year now so it’s not exactly breaking news. And as far as I know the status of these notes hasn’t changed in the interim.

Secondly, last I checked Lending Club & Prosper offer essentially the same product with the same types of risks & SEC regs apply to both outfits in the same manner. Yet your roundabout discussion seems to suggest that there are substantial differences between the 2…………. & serve to cloud the issues here, much like your off the cuff Ponzi remark did earlier.

Furthermore you seem to be suggesting that there are risks being taken at Lending Club that make it a riskier choice for investors vis a vis Prosper. If that is your position then spell it out exactly in plain & simple language. We’re all adults here, we can handle it.

Or are you perhaps trying to float something unsubstantiated while trying to retain your deniability with the obtuse references & nebulous language. Please, if there’s something we’ve all missed in our risk analysis, I’d really like to be enlightened. I’m sure others feel the same.

Peter Renton September 2, 2011 at 5:40 am

@Peerlend, I am going to have to agree with Dan on this one. It seems like you are suggesting that Prosper carries less risk because they are not taking on the leverage that Lending Club is taking on. But if you look at the June 30, 2011 balance sheets for both companies they look remarkably similar.

The vast bulk of liabilities (over 95% at both companies) are made up of investor notes. The only difference I see is that Lending Club has $53 million in preferred shares whereas Prosper has none. Is that what you are talking about? Now, I am not a bankruptcy expert but I would have thought that in the event of a bankruptcy these preferred shares would be subordinate to the investor notes, just like preferred shares are subordinate to corporate bonds in other bankruptcies.

As Dan says, are we missing something? Please enlighten us all if you have information that investors should know.

@Dan, Well said.

Michael September 2, 2011 at 6:51 am

In reference to the skin in the game reference:

LendingClub has funded $24,343,346 worth of loans.
$350,497,650 in loans have been issued, which means LendingClub funded 6.94% of all loans.

PeerLend September 2, 2011 at 7:34 am

Honestly, I’m not sure what I can and can’t disclose about the LC pitch doc which I received a while back, which was pushing some creative ways to go bigger into LC, through a variety of entities, some with priority/preference.

If any of you received those as well then I suggest you go and re-read them, and, if you’re more (legally) adventurous than I am, please feel free to post.

So – it’s not about you guys not being adults – it’s about me being a chicken!

Did anyone else get, say, the 3c1 invites? If so, you probably got what I am referring to about six months before the 3c1 pipelines started to ramp up…

Roy S September 2, 2011 at 7:39 am

I’m glad someone can follow PeerLend. There are too many quotes, parentheticals and em dashes for me to clearly understand what he is trying to convey.

@Shawn/Peter, My thoughts on loan origination on Prosper is that it will occur the following day (at a minimum) of the day the loan is completely funded. This means that if a loan completes funding on Aug 31st, the funds will be dispersed on September 1st at the earliest. I also believe that any loans that complete their funding after normal business hours on August 30th will not disperse the funds until September 1st, too. So you only need the data through the 30th of August (the data Propser makes available on the morning of the 31st) since the loan origination for the month has officially closed by then. In other words, your purchase date will never be the same as the origination date when you view your notes.

I think this is more what you were looking for, Shawn. Let me know whether this helps. And Peter, I’m sure you’ll let me know whether I’ve made any errors!

Louis Lamoureux September 2, 2011 at 7:45 am

@Peerlend Individual investors don’t have a mechanism for “leveraging” on Prosper or LC, unlike commercial banks who can fund 30x of loans to deposits (serious leverage!).
As for LC, yes, they have borrowed money and invested it in notes, but I think I read in the prospectus that they had stopped that. While it is leverage, it is 1:1 I would argue more benign than say NLY using 6x or 8x). Peter has previously written that LC could be or is already at breakeven which means they can service their debt from revenue (I have no idea when Prosper will reach breakeven). LC is also sitting on a sizeable war chest from a recent investment. The big risks affect both companies: for example the economy tanking and the majority of the loans go belly up, or the SEC changing their treatment of p2p loans.
Lou

Louis Lamoureux September 2, 2011 at 7:48 am

@Peerlend I think you are saying that several months or years ago, LC evaluated pledging their loan portfolio as collateral to borrow money to fund new loans.

Roy S September 2, 2011 at 8:33 am

@Louis, Thanks! That clears up a lot for me, and PeerLend’s posts make much more sense now! I can understand the desire to leverage the notes from LC’s perspective, but it is (at least, in my opinion) not something they should do to the investors. We are unsecured holders of the notes, and the last thing we need is another claimant on that asset if they were to go into BK. I can see how PeerLend would be upset over this (I would be upset, too). I did not read anything about this in Prosper’s prospectus, so I hope they are not doing this. Does anyone know the extent to which either platform is leveraging the notes?

Dan B September 2, 2011 at 10:35 am

Where’s the evidence? Does Perrlend fear for his life & need a safe house to go to before he reveals all? Perhaps an immunity deal? How about a guaranteed change of identity? Or perhaps a movie deal? LOL

Whatever he needs or wants, we should give it to him. Because this is obviously some real sensitive info. I mean I read the GAO p2p report & I didn’t notice anything this exciting.

Dan B September 2, 2011 at 10:54 am

Peter…………What did I tell you. Over 2 million for the month already at LC.

Peter Renton September 2, 2011 at 11:14 am

@Michael, Thanks for the up to date numbers on Lending Club. But when you look at 2011 where they have issued close to $150 million in loans only $5 million of that is LC funded loans.

@Peerlend, Well you have everyone curious now. I never received a 3c1 invite and I didn’t even know what you meant until I looked it up. Here is a definition for those interested: http://www.investopedia.com/terms/1/3c1.asp

@Roy, Your analysis of the Prosper lending process seems on target to me. I really haven’t followed the mechanics of it that closely.

@Lou, Good point about leverage. I really don’t think it applies to p2p lending. Lending Club or even individual investors can borrow money to invest in notes but it is all on a 1:1 basis as you point out.

@Dan, Plenty of times the people at Lending Club and Prosper have told me things that were off the record but that was to protect them, not me. Whatever Peerlend is talking about, I am not privy to it. But I intend to find out.

And yes, you are clairvoyant. This is the strongest start to the month for Lending Club since I have been following them. $2.4 million in a day and a half is way above normal. For comparison the first day of August saw a princely sum of $230,000 in new loans.

Dan B September 2, 2011 at 11:37 am

Peter…………..Maybe Peerlend has something earth shattering. Or maybe he’s just floating this to get a rise out of us. Hey I’ve been known to do this as well, so………………

Dan B September 2, 2011 at 11:46 am

Peter…………It’s not clairvoyance Peter. On Aug 31st I received a x5c4 memo from LC that alerted me to their plans. I could tell you more details but I’m too chicken to do so. :)

Peter Renton September 2, 2011 at 2:23 pm

Ok, I have some answers now. I just got off a conference call with Lending Club management and I asked them about some of these questions.

The 3c1 thing has to do with Lending Club’s private placement funds they started earlier this year. It is nothing nefarious but just a fund vehicle for their very large investors. This is one of the main reasons behind the big last day bumps in originations we have been seeing this year.

As for the leverage issue Lending Club has no idea what @Peerlend is talking about here. In fact, they said they would love to talk to you @Peerlend so they can understand what you are referring to here.

@Dan, I asked them about the x5c4 memo as well and they told me that was highly classified and that I probably couldn’t handle the truth about it. :-)

Dan B September 3, 2011 at 4:47 am

Peter…………Try not to take it personally. Who knows, perhaps they’ve been reading your recent posts on p2p ROI expectations & determined that your grasp of reality is tenuous as it is. No need to pile additional stress on you by exposing you to more truth. :)
Sorry I had to swing at that.

On a serious note, thanks for getting Lending Club’s input on all the Peerlend issues. I can’t say I’m surprised that it turned out to be mostly hot air but it’s still good that you got their official response.

Charlie H September 3, 2011 at 4:07 pm

So 3c1 invites would be invites to those “Qualified” profesionals that don’t need protection from themselves that the SEC provides?

Peter Renton September 5, 2011 at 8:40 am

@Charlie, Precisely. The SEC thinks that if you have a large net worth then you can don’t need “protection”. Unless, of course, you are a TBTF bank.

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