Why US credit unions partner with Zopa for US launch

The philosophy of credit unions is members helping members. Credit unions can easily embrace the peer-to-peer lending concept. Why should they do it? As creditunionmagazine.com suggest Zopa is an innovation that can help credit unions with their image – they can get hip again.

The roles will be shared in this win-win partnership. Borrowers will be members of the credit unions, whereas Zopa lenders will provide the money. The big advantage for Zopa lenders could be that a possible business model is that the lender lends to the Credit union which gives a CD to the lender. The podcast suggest that there will be no default risk for the lender. Credit unions see it as a good customer acquistion strategy.

The credit risk or loss of your principal investment would not apply in the US model. So what would happen is. Most everyones familiar with going onto Ebay. You can either bid on the item and take a risk on what you pay for it. Or you can do a buy it now type option. With a fixed rate CD you would get a buy it now option which would still be market leading rates or you can do a process which I call a variable rate CD with the credit risk spread out amongst borrowers and if a few people go into default maybe you do not get as high a rate, it goes down a little bit but still much better than the market rate. That adds some excitement to the product offering as as well.

Addison Avenue Federal Credit union has signed a letter of intent with a peer to peer lending service. "We see (person-to-person lending) pretty closely aligned with the credit union mission and as a way of attracting new members," says CEO Benson Porter.

More related sources: 1, 2 

Occupations with lowest defaults

Prosper.com noted in it's September lending market survey that the occupations with the lowest defaults on Prosper are:

    1)   Computer Programmer  0.96%
    2)   Civil Service  1.48%
    3)   Analyst  1.63%
    4)   Mechanical Engineer  1.67%
    5)   Electrical Engineer  1.85%

Lowest default rates by state are:

    1)   Minnesota  0.00%
    2)   Ohio  0.65%
    3)   New Jersey  0.99%
    4)   Colorado  1.40%
    5)   New York  1.56%

Of these only for New Jersey and New York there is a obvious explanation – the average interest rates for loans in these states are low due to the state lending limits. This means in these states more loans with good credit grades were founded – reducing the risk.

Prosper announces new features for lenders

Prosper has confirmed that it will release new lender features over the next few months. Most important is an risk estimator that will allow lenders better to gauge the default risk when bidding. Prosper will use its own data from past loans to calculate the risk level rather then only rely on Experian data like in the past.

See Mike's question and answers with Prosper Andrew and Matt's story on the changes for more details.

Free-riders on the p2p lending bandwagon?

In Germany at least four companies developed an approach that makes use of the media hype on buzz words like peer-to-peer lending or social lending.

Under the headline peer-to-peer lending they offer kind of a "dating platform" for borrowers and potential lenders. To attract borrowers they offer hope – even borrowers with bad credit history have the chance to get a loan. To the lender they promise high rates. But a close examination of these services reveals that one could just as good publish a classified in a paper to seek or offer a loan. The services do nothing but store the requests in a database, match them and inform both sides by email once a match was made. It is then up to the borrower and the lender to negotiate the loan terms, a contract, handle the money transfer and the repayments. Since they are not handling the money, the services are not regulated by German regulator Bafin.
Oh I forgot, the services do something else: they (at least 3 of the 4 I am aware of) charge the borrower a registration fee of about 9.50 Euro (approx. 6.75 US$). Note that the fee is not tied to a successful loan match but payable upon registration.

No wonder a German consumer protection agency cautioned against the use of offers like these. Calling it peer-to-peer lending might not technically be a false claim, but these services are worlds apart from comprehensive services like Zopa, Prosper and Smava.

P.S.: No I did not name the companies here in order not to give them more free traffic. The media already did that enough, because they often do not research enough.