P2P-Banking.com

Loanio has filed a S-1 registration with the SEC. P2P lending service Loanio had been briefly active in October and November last year before voluntarily closing to new users in order to seek SEC registration approval.

In the new SEC filing Loanio wants approval for offering 50 million US$ in notes based on peer to peer loans via their website Loanio.com. The filing includes the outlook for a secondary market (loan trading platform via a broker) and the plan that Loanio might partner with a “national financial institution”. Should that be achieved, borrower loans could be originated through this lending institution and then sold and assigned to Loanio. This would allow Loanio to offer loans to borrowers in more than the 22 states it has individual state lending licenses for now, and would eliminate (some) state interest caps.

The filing also gives insights into the company structure and expenses since foundation. Founder Michael Solomon hold 97% of the company shares.

Under the requirement to file with the SEC, starting a peer-to-peer lending company in the US market takes an unusual long pre-launch phase compared to other internet based business models.

Lending Club already completed the SEC approval process, while IOU Central and Prosper currently undergo this process. Pertuity Direct operates under a p2p lending model with a different setup.

The State of Montana signed an agreement with Prosper Marketplace Inc. to resolve matters relating to unregistered securities and securities fraud. (more…)

IOU Central, headquartered in Kennesaw, Georgia, Wednesday submitted an SEC S-1 Registration filing in order to launch in the US. IOU Central did launch a p2p lending service in Canada in Feb. 2008 for a brief period of time before it was closed due to regulation constraints.

Barry Coleman, VP Marketing at IOU Central, told P2P-Banking.com earlier this year:

… we are getting ready to release an online marketplace that will revolutionize peer-to-peer lending. Our platform will give borrowers the benefit of a true marketplace that allows for better interest rates. The platform will also give lenders freedom in lending with our real-time bidding system. We have taken a lot of the good from the original IOU Central platform and added features that make it much better for both borrowers and lenders.

The registration filing shows the minimum requirements IOU Central will apply to borrowers (Equifax Vantage score of at least 670 and others) and the validation process (most borrower income, employment and occupation information will be self-reported and not verified). The interest rate is set by the IOU Central loan marketplace based on several borrower related criteria. There will be auction bidding by lenders (like at Prosper) and an auto-fund option. Furthermore lenders can set auto-bidding parameters.

IOU Central will charge lenders a servicing fee of 1% of the remaining principal balance. Borrowers pay a 2% loan origination fee.

Terms of the loans will be 1, 2 or 3 years.

(more…)

Less than 2 weeks after reopening the p2p lending platform Prosper.com has closed down again, not accepting new lenders and borrowers.

The website currently displays the following message:

Prosper is Currently in a Quiet Period

We have been overwhelmed by the outcry from potential investors around the country who want to participate in peer-to-peer lending. Thank you for your support and your letters to us.

After much consideration we have decided to voluntarily shut down our operation in order to complete our SEC approval for a nationwide peer-to-peer lending platform. As a result, due to regulatory concerns, and in the interest of working toward getting our registration statement effective as soon as possible, we are discontinuing our California intrastate offering at this time.

If you’re an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.

If you are a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process.

We want to assure you that Prosper is looking forward to being able to offer a transparent, durable and participatory lending institution very soon.

As a result of this decision, we will not be accepting new lender or borrower registrations or loans, or new commitments from existing lenders effective immediately. Until this process is complete, we are required to be in a quiet period and will be unable to respond to press, blogger or other inquiries related to our SEC registration process, even though we would like to.

We sincerely apologize to the Prosper community members for this inconvenience or disappointment our decision may have caused. We want to thank those of you who demonstrated your support through your active participation whether by investing with us again or referring friends to our site.

Thank you in advance for your understanding, support and patience once more. We look forward to serving the needs of the community in the hopefully not too distant future.

What a mess.

Prosper.com has restarted offering p2p lending to customers after an SEC imposed 6 months stop (quiet period).

Prosper chief executive Chris Larsen said the California Department of Corporations has authorized the company to resume raising money in California and then lending it out under a system that lets borrowers and lenders use bids to set the interest rates on loans. “I hope this leads to wider acceptance of peer-to-peer lending,” said Commissioner of Corporations Preston DuFauchard. He said the state’s experience with Prosper, prior to the SEC intervention, made it “comfortable” that its bidding system gives lenders the information they need to invest in loans wisely.

Prosper hopes to reopen for lenders from other states but it remains uncertain when Prosper will be allowed to do so.

Prosper raises the minimum credit score required to 640 (Grade C under the old rating). This applies only to new borrowers. Borrowers registered before the quiet period that have lower credit grades can still apply for second loans (example: loan listing of a HR borrower).

Besides “direct” p2p loan listings, Prosper offers “Open Market Listings“, which are described as following:

Open Market loans are existing loans that were underwritten by financial institutions that are credit experts in areas such as auto loans, small business loans or social impact loans. The loan seller describes the loan in an Open Market listing, and then sells and assigns the loan to Prosper.

Open Market loans may include existing consumer loans or retail installment sale contracts. They can be secured or unsecured loans, and may include small business loans, where the borrower is a business entity, not an individual.

Open Market listings describe the existing Open Market loan, owned by the loan seller, which is offered for sale on the Prosper marketplace. Each listing displays information to assist the lender in making an informed bidding decision. Lenders can review the sale price for the Open Market loan, the yield percentage that corresponds to the sales price, the remaining principal balance of the loan and the interest rate the borrower is obligated to pay on the loan.

In some instances on auto loans, you can even see the factory where the car was built. This is all part of the transparency Prosper brings to the marketplace so that you can make informed decisions on how to invest your money.

Prosper plans a secondary market which in future will allow lenders to trade notes.

(Sources: Prosper, San Francisco Chronicle)

Prosper.com, which is still in quiet period and not allowing new loans, made a new SEC filing yesterday. In this third amendment to the S-1 filing makes several amendments, most notably introducing securitization for initial offerings of loans.

Prosper plans “Open market loans”, which apparently are loans issued by traditional lenders which being securitized and resold to Prosper lenders. I am somewhat sceptical how many Prosper lenders will like the “open market loans” offer. To me this seems a far excursion from the peer to peer lending idea.

In the filing Prosper states that FolioFn will be the operator of the Prosper secondary market (named “Folio Investing Note Trader Platform”). FolioFn already operates the Note Trading Platform of Lending Club.

More changes in the new filing are in a review in this blog post at P2PLendingNews.

There is a new initiative “Call for EU legislation to encourage microcredit schemes“. One aim of the initiative is:

EU-wide framework on supervision and regulation

There also needs to be an EU-wide regulatory framework for non-bank providers of microcredit (banks are already covered by existing rules), defining them as non-deposit takers, with the ability to conduct credit only activities and to on-lend. There should be harmonised, risk-based rules on authorisation and supervision.

This would help p2p lending services.

Thank you to Peter Petrovics of Noba.hu for supplying the link.

Guest article by Peter Petrovics, co-founder of Noba

First of all, let me thank Wiseclerk for the opportunity to post this guest piece on his blog.
I am excited to announce the January launch of the first Hungarian p2p lending service:

www.noba.hu

Also, as a regular reader of Wiseclerk’s posts, I am hoping to be able to draw on the wisdom of his readership in a particular legal problem we have run into while setting up our initiative.

My name is Peter Petrovics, and I have some modest experience working with online communities, while Charlie Szabo, my partner in Noba, is an accomplished former banker. We both have been deeply interested in the entire concept of p2p lending since we first heard of it. We  started our project in our native Hungary last summer .

We opted on a dual system: one is dedicated to the P2P lending model, where we hope to see micro projects raising money through friends, family, social network and eventually anyone interested enough in the given venture.

The other section is dedicated to channel loans to the high number of people living in deep and prolonged poverty around the country. We call these “charity” loans, and this part of noba.hu is similar to Kiva.org with the difference that it is limited to Hungary. Applicants for these loans are assisted by a mentor, who is typically an NGO or social worker, in managing their loan applications and projects.

We hope, that noba.hu will not only allow a flow of funds, but will eventually create synergies between lenders and borrowers in terms of know-how, contacts, partnerships.

Both types of loans are intended to allow lenders to make real profit, hoping on the long run to attract a larger community of private and institutional lenders.

This is however the part where we run into a very tenacious obstacle: under Hungarian law, lending (on interest) is a privilege strictly reserved to banks - private individuals are allowed to give a single loan per year, the second loan would be considered as providing commercial banking services without legal authorization. This means that the people who are willing to participate in a P2P loan project as lenders are only allowed to lend the money with a 0% interest, unless these natural persons are founding registered financial institutions.

I would be grateful for any input regarding this problem. We have made some research, and found that similar regulatory restrictions have been overcome by other initiatives in the UK, the Netherlands and Germany, but I would be interested to hear any new ideas from you.

Does anybody have any idea if the whole issue could not be approached from an EU regulatory side? Could prove to be an easier path, than pursuing separate battles against the local legal systems.

Thank you for your attention, and looking forward to your comments.

Peter

Prosper.com yesterday announced it’s new registration filing.

The SEC filing follows an earlier one from last year that apparently did not succeed. Some speculation on the reasons Prosper’s first filing was ill-fated are on Fred93’s blog.

According to the filing, the class action lawsuit against Prosper reported previously on this blog, is currently the only class action lawsuit by lenders stated in the filing.

The sections on ‘Government regulation’ (page 73) and ‘Risks Relating to Compliance and Regulation’ (page 32) state numerous other legal risks the Prosper business model might face in the future.

For the year 2007 the filing reports that Prosper marketplace incurred a net loss of 11.8 million US$ - but still had more than 20 million US$ in cash or cash equivalents on Dec. 31st, 2007.

The following quote shows that in many attempted listings Prosper was not able to verify the income of the borrowers:

For example between September 1, 2007 and August 31, 2008, we verified employment and income for only approximately 22.6% of borrowers. …

Of the borrowers undergoing income verification for the period from September 1, 2007 to August 31, 2008:

+ approximately 56.7% provided us with satisfactory responses and received a borrower loan;
+ approximately 37.7% did not provide satisfactory responses, or did not respond, and their listings were cancelled; and
+ approximately 5.9% either withdrew their listings, or failed to receive bids totaling the amount of their requested loan.

On a side note: The document also discloses that Prosper bought the Prosper.com domain in 2006 for a price of 603,659 US$ (page F-14), of which 320,000 was payed in cash.

The SEC cease and desist order against Prosper offered the legal arguments on a plate, now the first class action lawsuit filed against Prosper Marketplace Inc. uses the SEC filing as exhibit A to state it’s case. Regarding numbers and affected lenders the lawsuit by The Rosen Law Firm, New York, states

“…As of October, 2008 approx. $21.7 million of loan notes purchased by Class Action members have become worthless because the borrowers did not pay the loans to Prosper. Additional loan notes will become worthless as more loans are charged off as uncollectible.
…
there are tens of thousands, and perhaps hundreds of thousands of, loan note purchasers that are class action members…”

Prosper is required to file a written response within 30 days. The first court date is set for May 1st, 2009.

On the same issue - selling unregistered securities - but in an otherwise unrelated case Prosper agreed to pay a 1 million US$ fine in a settlement to the states to avoid individual states suing against Prosper. More information on that in the press release of the North American Securities Administrators Association (NASAA).
This is somewhat surprising to me as Prosper did obtain licenses in over 25 states and conducted lending under those, before it switched to the model using the WebBank. (see ‘Prosper riding the state-by-state roller coaster‘ and ‘Prosper goes national with 36 percent max interest rate‘). The same states that granted the licenses now wanting to sue Prosper?

Last week Zopa’s CEO Giles Andrews commented that regulation issue were the reason why Zopa did not use it’s UK model when it entered the US market.

While Lending Club has completed SEC registration and therefore is in compliance with the rules of the SEC, it might still face some risks. An article of the Oregonian on the NASAA settlement states:

“Oregon regulators also are investigating 40billion.com, owned by Atlanta-based 3 Guys in a Garage, and is currently reviewing a registration request by Sunnyvale, Calif.-based Lending Club, Anselm said.”