Friday, October 17, 2008

Easy Come, Easy Go: Prosper.com Hits Regulatory Hurdle


OK. Remember earlier this week when I posted a story about alternative lending? You remember. It was the upbeat story about peer-to-peer (p2p) lending -- and how this credit crisis is good for business (link here). That story was written by Economix, a blog at the New York Times. The blog pointed out that more traditional-looking borrowers were turning to p2p for funding needs during the credit crisis. Sounded like good news to me. Well, not so fast.

On Wednesday, Prosper.com, a leading p2p site, said that it would no longer allow lenders to make new loans on its site. What's more, it won't allow any new loans until the Securities and Exchange Commission reviews its regulatory filings. Ouch. This isn't good news for the unprofitable lending outfit.

From the New York Times, which has a story out that explains the situation nicely: Lending Alternative Hits Hurdle (link here)

"Monthly loan volumes at the company have been declining since the credit crisis worsened this spring. Prosper, which is unprofitable after raising $40 million in venture capital, now faces the damaging possibility that lenders may take their money off the site instead of waiting for the S.E.C. to allow lending to resume. That could take several months."

As I said before, ouch. A lengthy review process could kill Prosper.com. Loan volumes had already been sinking, according to the article. This isn't what Prosper needs right now.

"Other large lenders on Prosper have simply stopped lending altogether. Half of the 20 largest lenders on the site have not made a new investment since August, according to the tracking site Lendingstats.com. A majority of the others have markedly decreased their lending. That might account for the declining month-to-month activity on the site during a time when Prosper needs to show that it has legs."


Related Articles:

  • In Credit Crisis, Some Turn to Online Peers for Cash


  • 4 comments:

    1. This is an obvious attempt by the big banks to use regulators to bludgeon competitive lending alternatives that would have naturally grown while they sit on the money the taxpayers are giving them as part of the bailout. That said, Prosper in its communications with lenders didn't make it look like this was something they had been forced to do but rather something they were proactively doing to increase lender liquidity by enabling a secondary market. It looks like that presentations was somewhat disingenuous.

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    2. DM, I believe that Prosper.com reevaluated the situation. Chris Larsen spoke on Monday. He didn't think that this would be a necessary step. My guess is that the SEC wants to make sure that these lending companies are not running afoul of securities laws.

      I see this taking a while.

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    3. I have mixed feelings about the SEC getting involved. I have been considering lending on prosper for a few months. Somehow so many borrowers seemed sorta slimey I did not want to lend. I kept questioning "at that interest rate why are you not going through a traditional lender" sort of a this is too good to be true type assessment. An SEC review of the process may make me feel more comfortable - of course the SEC had no problem with Sub-Prime Mortgage backed securities too.

      I feel most lenders from prosper have either headed to the safest investment they can find or have realized the massive amounts of low hanging fruit on the stock market right now at better returns than prosper.

      Great find CM - nice to get beyond credit cards for a bit.

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    4. Anon, thanks for posting. I remember back in the day when I was thinking about lending. I was trying to get a funding group together. However, I could not find enough people who were willing to go in with me. Seems they were too worried about the high default rates. I signed up as a lender but I never did lend a dime.

      As for the SEC's role, this is about whether Prosper.com and its ilk need to be registered as investment vehicles. To now, they have not been. The SEC is now taking a look.

      We shall see what happens.

      Thanks again for the comment.

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