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Peer-to-peer Web lending focuses on small loan availability
“If it seems like a nifty idea, I think it’s something that a borrower needs to be very cautious about,” said Warner Norcross & Judd partner Shane Hansen, a securities lawyer.
P2P sites cropped up in the U.S. as the recession and its credit crisis began to take hold. Modeled after a site based in Britain, P2P lending sites match investors with borrowers in an eBay-like bid setting.
The Web sites have drawn venture capital banking in a new industry that research firm Celent two years ago predicted would top $5 billion in 2010. Lenders are usually small investors looking to make an interest gain. The amounts borrowed are generally less than $25,000. Borrowers may use the money for any use, including small businesses.
Last year, Lending Club (www.lendingclub.com), based in Sunnyvale, Calif., and originally launched for Facebook members, went to the Securities and Exchange Commission to work together to sort out regulatory issues. The result was a conclusion that those jumping into P2P lending on the lenders’ side were actually buying securities and the fledgling service should fall under those rules as well as state securities laws.
Lending Club re-started under the new rules in October.
One of its competitors, Prosper Marketplace Inc. (www.prosper.com), paid the North American Securities Administrators Association $1 million in December to settle charges of selling unregistered securities in about 20 states from 2006 to November 2008. In July, Prosper re-started operations in 16 states.
Business at a third Web site, Loanio.com, is currently suspended under the “quiet time” that is part of the SEC process.
Jason Moon, spokesman for the state Office of Financial and Insurance Regulation, said Lending Club and Prosper have applications pending to start operations in Michigan under the new rules.
“Right now there are not registered companies authorized to participate in P2P lending,” Moon said.
However, millions were lent in Michigan through the sites before the regulatory issues set in, in 2008.
Grand Valley State University Professor Greg Dimkoff said he’d advise lenders and borrowers both to be careful.
“Most of these P2P loans are really small,” he said. “They can be hundreds of dollars, they can be $50. On the surface, it seems like a risky proposition. This is not something I would ever tell anybody to get into unless they had more money than they needed.”
What’s missing for both borrower and lender in the process is the fourth “C” of credit rules of thumb, he said: character.
“They should not assume that the customary borrower protections that you have when you’re dealing with a bank are there, because these Web sites are not banks and so there’s very little, if any, regulatory oversight of these activities,” Hansen said. “A borrower or a potential borrower who is interested in doing this should do some pretty careful investigating about the Web site they are using, and before they sign anything, be sure they understand what they are going to be paying for the loan.”
Among points to look for are: interest rates that comply with state law; fees such as origination fees or late fees; and penalties should the borrower miss a payment or fail to pay at all.
“The commercial type loans available on these peer-to-peer Web sites are not large in amount,” Hansen said. “It may be if they need more money to start a business — $5,000, $10,000, $15,000 — this is not going to be a good source for more than a small loan.”
But with signs that the recession is bottoming out, it may be that credit will become more available at traditional, and well-regulated, lenders such as local banks or credit unions, especially for sole proprietorships, he said.