Introduction to-Peer to Peer Lending

 Contact: Eric Ogi-Wealth Strategy Coach ph 808-756-7234 erichogi@yahoo.com SKYPE: ehomkt61

Overview[edit]

Most peer-to-peer loans are unsecured personal loans. They are made to an individual rather than a company, and the borrowers do not provide collateral as a protection to the lender against default. Business loans, including secured loans, are offered by some companies.

The interest rates are set by lenders who compete for the lowest rate on the reverse auction model, or are fixed by the intermediary company on the basis of an analysis of the borrower's credit.^[1] Borrowers assessed as having a higher risk of default are assigned higher rates. Lenders mitigate the risk that borrowers will not pay back the money they received by choosing which borrowers to whom to lend, and by diversifying their investments among different borrowers. The lender's investment in the loan is not protected by any government guarantee. Bankruptcy of the peer-to-peer lending company that facilitated the loan may also put a lender's investment at risk.

The lending intermediaries are for-profit businesses; they generate revenue by collecting a one-time fee on funded loans from borrowers and by assessing a loan servicing fee to investors (either a fixed amount annually or a percentage of the loan amount).

Because many of the services are automated, the intermediary companies can operate with lower overhead and can provide the service more cheaply than traditional financial institutions, so that borrowers may be able to borrow money at lower interest rates and lenders may be able to earn higher returns. Compared to stock markets, peer-to-peer lending tends to have both less volatility and less liquidity.^[2]

Characteristics[edit]

Peer-to-peer lending does not fit cleanly into any of the three traditional types of financial institutions—deposit takers, investors, insurers^[3]—and is sometimes categorized as an alternative financial service.^[4]

The key characteristics of peer-to-peer lending are:

• it is conducted for profit;
• no necessary common bond or prior relationship between lenders and borrowers;
• intermediation by a peer-to-peer lending company;
• transactions take place on-line;
• lenders may choose which borrowers to invest in;
• the loans are unsecured and are not protected by government insurance;
• loans are securities that can be sold to other lenders.

Early peer-to-peer lending was also characterized by disintermediation and reliance on social networks but these features have started to disappear. While it is still true that the emergence of internet and e-commerce makes it possible to do away with traditional financial intermediaries and that people may be less likely to default to the members of their own social communities, the emergence of new intermediaries has proven to be time and cost saving. Extendingcrowdsourcing to unfamiliar lenders and borrowers opens up new opportunities.

Most peer-to-peer intermediaries provide the following services:

• on-line investment platform to enable borrowers to attract lenders and investors to identify and purchase loans that meet their investment criteria
• development of credit models for loan approvals and pricing
• verifying borrower identity, bank account, employment and income
• performing borrower credit checks and filtering out the unqualified
• processing payments from borrowers and forwarding those payments to the lenders who invested in the loan
• servicing loans, providing customer service to borrowers and attempting to collect payments from borrowers who are delinquent or in default
• legal compliance and reporting
• finding new lenders and borrowers (marketing)

History[edit]

United Kingdom[edit]

The first company to offer peer-to-peer loans in the United Kingdom was Zopa. Since its founding in February 2005, it has issued loans in the amount of 400 million GBP and is currently the largest UK peer-to-peer lender with over 500,000 customers.^[5][6] In 2010 Funding Circle became the first peer-to-business lender launching in August 2010 and offering small businesses loans from investors via the platform.^[7] Funding Circle is currently the second largest lender, having lent 170 million GBP as of November 2013.^[8] RateSetter became the first peer-to-peer lender to make use of a provision fund to safeguard lenders against borrower defaults, launching in September 2010.^[5] MarketInvoicebecame the first peer-to-business lender lending specifically against invoices.^[9] Assetz Capital, which started lending in 2013, has made the largest peer to peer loan in the UK to date, having made a £1.5m loan for development of some student accommodation in Nottingham.

In 2011, Quakle, a UK peer-to-peer lender founded in 2010, closed down with a near 100% default rate after attempting to measure a borrower's creditworthiness according to a group score, similar to the feedback scores on eBay; the model failed to encourage repayment.^[5][10] In May 2012, the UK government promised to invest £100 million to small businesses through alternative lending channels, including peer-to-peer lenders, hoping to bypass the mainstream banks that are reluctant to lend.^[10][11] The peer-to-peer companies are predicted to issue up to £200 million of loans in 2012.^[12]

The peer-to-peer industry adheres to standards set by the self-governing Peer-to-Peer Finance Association. Peer-to-peer depositors do not qualify for protection from the Financial Services Compensation Scheme (FSCS), which provides security up to £85,000 per bank, for each saver^[11] but the Peer-to-Peer Finance Association mandates the member companies to implement arrangements to ensure the servicing of the loans even if the broker company goes bankrupt.^[10] As of October 2013, UK peer-to-peer lenders have collectively lent 600 million GBP.^[13] rebuildingsociety.com launched in September 2012 by internet entrepreneur Daniel Rajkumar and Gary Lumby.^[14] The first loans were completed in February 2013 ^[15] The UK government announced that the Financial Conduct Authority will regulate the industry from April 2014.^[16]

United States[edit]

The modern peer-to-peer lending industry in US started in February 2006 with the launch of Prosper, followed by Lending Club and other lending platforms soon thereafter.^[17] Both Prosper and Lending Club are located in San Francisco, California.^[18] Early peer-to-peer platforms had few restrictions on borrower eligibility, which resulted in adverse selection problems and high borrower default rates. In addition, some investors viewed the lack of liquidity for these loans, most of which have a minimum three-year term, as undesirable.^[4]

In 2008, the Securities and Exchange Commission (SEC) required that peer-to-peer companies register their offerings as securities, pursuant to the Securities Act of 1933.^[17][19] The registration process was an arduous one; Prosper and Lending Club had to temporarily suspended offering new loans,^{[20][21][22][23]} while others, such as the U.K.-based Zopa Ltd., exited the U.S. market entirely.^[20] Both Lending Club and Prosper gained approval from the SEC to offer investors notes backed by payments received on the loans. Prosper amended its filing to allow banks to sell previously funded loans on the Prosper platform.^[4] Both Lending Club and Prosper formed partnerships with FOLIO Investing to create a secondary market for their notes, providing liquidity to investors.^[24] Lending Club had a voluntary registration at this time, whereas Prosper had mandatory registration for all members.^[25]

This addressed the liquidity problem and, in contrast to traditional securitization markets, resulted in making the loan requests of peer-to-peer companies more transparent for the lenders and secondary buyers who can access the detailed information concerning each individual loan (without knowing the actual identities of borrowers) before deciding which loans to fund.^[20] The peer-to-peer companies are also required to detail their offerings in a regularly updatedprospectus. The SEC makes the reports available to the public via their EDGAR (Electronic Data-Gathering, Analysis, and Retrieval) system.

In 2009, the US-based nonprofit Zidisha became the first peer-to-peer lending platform to link lenders and borrowers directly across international borders without local intermediaries and institute borrower risk analysis in the absence of digital records of financial history.^[26] More people turned to peer-to-peer companies for lending and borrowing following the financial crisis of late 2000-s because banks refused to increase their loan portfolios. On the other hand, the peer-to-peer market also faced increased investor scrutiny because borrowers' defaults became more frequent and investors were unwilling to take on unnecessary risk.^[27]

As of June 2012, Lending Club is the largest peer-to-peer lender in US based upon issued loan volume and revenue, followed by Prosper.^[17][18][28] Lending Club is currently also the world's largest peer-to-peer lending platform.^[29] The two largest companies have collectively serviced over 180,000 loans with $2 billion in total:^[12][17][18] as of March 22, 2012, Lending Club has issued 117,412 loans for $1,512,560,075^[30] while Prosper Marketplace has issued 63,023 loans for $433,570,651.^[31] With greater than 100% year over year growth, peer-to-peer lending is one of the fastest growing investments.^[17] The interest rates range from 5.6%-35.8%, depending on the loan term and borrower rating.^[32]The default rates vary from about 1.5% to 10% for the more risky borrowers.^[18] Executives from traditional financial institutions are joining the peer-to-peer companies as board members, lenders and investors,^[12][33] indicating that the new financing model is establishing itself in the mainstream.^[19]

In October 2013, the UK based peer-to-business lender, Funding Circle, announced that it had raised $37 million investment. Accel Partners led this round of funding, which brings the company’s total to $58 million. New investor Ribbit Capital contributed, along with existing investors Union Square Ventures and Index Ventures.^[34] Additionally, Funding Circle announced it was launching in the US and joined forces with Endurance Lending Network. Endurance now trades under the Funding Circle name.^[35]

The latter half of 2013 saw increased interest from Wall Street investors in these peer-to-peer assets.^[36] In November 2013, alumni-based student lender SoFi (Social Finance, Inc.) announced a deal with Barclays and Morgan Stanley to create a bond backed by peer-to-peer student loans, and this would create the first securitization of these loans to receive a credit rating.^[37]