Prosper riding the state-by-state roller coaster

Most changes and discussion around Prosper.com in May related to the impact of the changes Prosper did to the State Lending Limits on May 1st. While Prosper lending is nearly nationally available (46 of 50 stats) it is regulated based on state laws. Since the launch of Prosper several parameters differ depending on the state the borrower is living in:

  • Maximum interest rate: In states without severe restrictions borrowers can offer up to 30 percent interest rate. Other states are capped to much lower rates (e.g. Pennsylvania allows 6% maximum)
  • Maximum loan amount. Prosper usually allows borrowing up to $25000. In some states lower amount maximums are imposed (e.g. Vermont – $4000).
  • You might not believe it but even the minimum loan amount is regulated in some states. In Georgia loans through Prosper must have amounts of at least $3001. Borrowers can deal with this, by borrowing the minimum and directly repaying the unneeded surplus.
  • Further differences existregarding Late Fees and Failed payment fees

While most users were unsatisfied  they had over time accustomed themselves fairly to the situation. Main impact was that in states with low rate caps nearly no loans were founded.

This by state table shows the concentration of funded loans on few states like California, Georgia and Texas while other populous states like Pennsylvania, Tennessee, Ohio und Kentucky saw only a handful of successful loans.

But progress was made. Prosper succeeded in gaining licences for states, allowing higher maximum interest rates in these states.

On May 1st Prosper conducted many changes. For the first time maximum interest rates sank in some states, e.g. in Texas from previously 30 percent to 10 percent. In other states loans for personal purposes are no longer available. Changes apply to all new listings.

The rules got more complicated, since for some states:

  • different rules for private and business loans were introduced
  • maximum loan rates are different depending on loan amount
  • APR is used to determine maximum interest rate, while in other states nominal interest rate is used.

Prosper did not disclose the reasons that led to these changes but explained:

All of the changes being made to our rate and loan amount limits are being made by Prosper on our own accord and are not being mandated by any state or federal regulatory authority. Prosper, like any other state-based lender, must make its own legal analysis and determination as to how various state regulations should be (or will be) interpreted, and establish state-by-state rate and loan amount limits accordingly.

Many users found the changes unsatisfactory. Group leaders that concentrated on impacted states complained that prosper made their business impossible. There were discussions how a business loan is defined and how Prosper will validate if the loan is used for business purposes. (Answer: If the borrower has written in his listing that the loan is for business purposes then it is, there is no validation). There was even speculation, if Prosper knowingly violated Texas state law.

A small number of lenders rallies for lobbying to influence state legislation. Others argue Prosper should obtain a  national licence based on federal law.

Zopa has announced it will launch national in the US.

Whether caused by this changes, the high default rates or other reasons: the growth of the count of recentlöy active lenders did slack in the last weeks. While new lenders enter the chart indicates, that numerous lenders stopped reinvesting and are withdrawing.

Zopa sells leads of borrowers with low credit grade

Borrowers with unsatisfying credit seeking a loan can not use Zopa.com. Instead of just declining these applications, Zopa now sells these leads through Paaleads.com.  Brokers and financial advisors can bid to obtain these leads. (Source Mortgagesolutions-online.com)

Paaleads classifies the leads in three categories:

  • Unsecured loans – homeowners over 10.000 pounds
  • Unsecured loans – homeowners below 10.000 pounds
  • Unsecured loans – non homeowners

As the screenshots below (taken today) show, the leads are selling for prices of up to 35 pounds.

Zopa sells leads

Zopa sells leads

Zopa sells leads

Booberwatch offers statistics on boober.nl p2p lending

The new website booberwatch.nl offers p2p lending stats for the Dutch p2p lending service boober.nl (as wiseclerk.com does for prosper.com stats). While the site is in Dutch language, it has many charts and tables that can be understood without speaking Dutch. The main page shows the fluctation of average interest for each credit grade over time. According to booberwatch 536207 Euros have been loaned so far.

P2P Lending in Denmark offered by Fairrates.dk

Today I received an email from Arkadiusz Hadjuk of Fairrates.dk informing me, that his company started to offer p2p lending in Denmark. Most of the following information was supplied by him.

At Fairrates.dk:

  • There are individual listings, both lending and borrowing
  • There are no groups
  • There is auction bidding down interest rates, both lending and borrowing
  • In case of non-payment (for over 1 month) a lender is assisted with
    a collection procedure
  • Minimum loan is 1000 DKK (approx. 135 Euro; approx $100)
  • There is no maximum a lender can lend
  • Maximum per loan is 50.000 DKK (approx. 6700 Euro; approx. $5100)
  • Borrower can request minimum 1000 DKK
  • Borrower can request maximum 50000 DKK until his income information
    is verified – then the limit is lifted up
  • Minimum bid is 1000 DKK
  • Only people over 18 years old with Danish CPR number and Danish bank
    account can lend/borrow
  • No interest on unlend deposits
  • Simple fee structure (borrower pays 1% of loan amount)
  • Risk assessment is based on information and documentation provided
    by borrowers.

I did technorati and Google searches for additional information. Since I don't speak Danish I could not find much additional information, only a profile of Arkadiusz Hadjuk and a CV of Robert Pawel Bialek (CEO).

Judging by forum activity at Fairrates.dk there is not much traffic yet.

Smava.de – the business case

Following the previous post on Smava.de here is a look on the business case of the smava startup and the chances for profit.

Currently Smava earns only when a loan funds. Smava charges the borrower a 1% fee of the loan amount.  Only other fee are 10 Euros per dunning letter (which is covers the costs of the dunning letters but is otherwise neglectable).

Possible reason for the low fee (in comparison to Prosper and Zopa) are the low interest rates in Germany which might not allow for higher fees. Loans range from 500 to 10.000 Euro. Assuming an average loan amount of 3000 Euro Smava would earn 30 Euro.

Looking at transaction costs, we have:

  • Identity check of borrowers and lenders via PostIdent (approx 5 Euros each)
  • Creditgrade check (estimate 1 Euro)
  • Validation of documentation for borrowers (estimate 5 Euro, based on typical call center cost, actual inhouse costs could be higher or lower)
  • Validation of documentation for lenders (estimate 3 Euro, based on typical call center cost, actual inhouse costs could be higher or lower)

Even looking at this transaction costs without taking into regard marketing, overhead, legal and setup costs it seems that Smava faces quite a challenge and will have to focus on automation of processes.

A critical factor in my view is the fact, that costs for lender and borrower identification are incurred before anything happens and regardless if borrowers and lenders become active. Learnings form Prosper.com are that 103.000 listings created only 9000 loans, which means 90% of listings gounfunded. Of the 230000 Prosper.com members about 23000 have the role lender. Only 12000 of these were active in the last 30 days.

Prosper does some verification only when a listing will fund. 

An interesting factor of Smava is the high minimum fee of 500 Euro (which Colin Henderson was quick to point out). 

In a call founder Eckart Vierkant reasoned that a lower minimum was not necessary due to the automatic risk spreading through the Anleger-Pool (see previous post).

The 500 Euro minimum has 2 interesting effects:

  • since the lowest unit is 500 Euro, deposits from 0 to 499 Euro will accumulate on the lender accounts. Lenders collect non interest on these unloaned amount. Assuming an average 'parked' amount is 200 Euro and that the bank partner of Smava invests this money earning a return of 5 % that would mean 10 Euro profit per year and active lender
  • the 500 Euro minimum keeps small lenders out (at least in theory since anybody can register for free)

It will be interesting to see how Smava deals with that challenge in future.