Credit Infocenter

Prosperity of Person-2-Person Lending in Jeopardy

November 3rd, 2008 · 5 Comments · Banking

by Kristy Welsh

(Last Updated On: February 10, 2017)

With the credit and banking situation in the United States facing uncertainty and turmoil, the “person-2-person” (P2P) social lending sites that have sprouted up in the last several years initially seemed like they had found a successful market niche. A recent article in the New York Times, however, indicates that the social lending industry appears to have “hit a hurdle”.

According to the article, in the last three years, internet start-up P2P lenders with names like Prosper, Lending Club, Zopa and Loanio have all come out of the gate running in pursuit of that market niche. Together, these companies were on pace to broker roughly $150 million in loans this year, a 50 percent increase over 2007, according to the Online Banking Report, a financial industry newsletter. However, as the credit market tightened even further this past spring, monthly loan volumes, membership growth and the number of active lenders and borrowers has decreased significantly.

To add fuel to the fire,  increased regulatory scrutiny of the industry has prompted the lenders to  register with the S.E.C to create a secondary marketplace for these loans, a process which requires them to shut-down new lending for a period of up to 6 months. The Lending Club was the first to suspend new lending last April, and they were essentially shut down until mid-October as they went through the filing process with the S.E.C.; an act which, not surprisingly, did not make their investors/lenders happy, and many withdrew their funds.  U.K. based Zopa, which has created lending sites in Britain, Italy and Japan, shut down it’s P2P lending site in the U.S. in early October amid the tightened credit market conditions. Prosper, after initially resisting the action, has recently begun the process as well: their website indicates that “Prosper 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.”

With the increasingly stringent requirements imposed by lenders in the current credit crunch, people with less than “A” credit have been forced to look elsewhere for solutions to their credit needs. Banks aren’t always eager to give out loans for things like paying off a credit card, and this situation has given rise to social lending. Some sites let you collect interest as the lender, and some simply give you the opportunity to help someone out. It’s an option for some less-than-A-credit people where previously, there did not seem to be one.

An excerpt from the NY Times article on Prosper:

Mr. Larsen of Prosper said he expected that things could get rough during the current economic crisis, but that peer-to-peer lending was well suited for a protracted recession.

“In many ways this is a good opportunity for us to show we can be part of the solution,” he said. “I just love the idea that Americans have a place to turn for credit, and that they don’t have to wait for lenders and major banks to decide when we are going to come out of this thing.

Only time will tell and certainly we wish them luck in making this service continue to work for the sake of those that find it a reasonable solution to their financial needs.

Tags: ······

5 Comments so far ↓

  • | Zhang's Blog

    […] Club, Zopa and Loanio have all come out of the gate running in pursuit of that market niche. Read More|||But I couldn%26#39;t imagine what news could compete with the launch of Loanio, the closing of […]

  • Craig

    I heard about peer to peer lending this morning on NPR radio, and I could not contain my happiness to know this concept existed. What a great idea! 💡

    I went looking for more information and found the NYT article you reference, but I also found many other ones that are more positive.

    I just signed up, and will start lending soon. Have you tried it? what is your experience?

  • Cindy

    Thanks Craig – I agree, there are mixed reports out there and like the stock and real estate market, I hope it rallies soon. I have not tried it on “either side” but I think Kristy has experimented a little. Maybe she’ll share anything of relevance when she returns from vacation!!

  • Colin Henderson

    I found the NYT article a little confusing by mixing company specific issues such as Prospers credit methodologies or Zopa’s Credit Union issues, along with the regulation of the industry.

    My take would be that the regulation ought to be welcomed in the sense that it legitimizes the space, and offers the credibility to participants as borrowers or lenders.

  • Rob

    Agree with Colin.

    Lending Club is the first and only p2p lending site that has gone through the registration process with the Securities and Exchange Commission, and is now open to both Borrowers and Lenders.

    Being registered with the SEC adds a level of legitimacy and safety to Lending Club that no other P2P lending platform can offer, and it ought to be seen as a very positive step forward for this industry, not as a sign of trouble.

    Rob G from Lending Club

Leave a Comment