Big news – Prosper goes national with 36 percent max interest rate

Announced today Prosper.com has achieved nationwide lending (exceptions South Dakota and Texas) with an interest rate maximum of 36 percent. Previously maximum interest rates varied on a state by state basis depending by the licenses Prosper had acquired.

Prosper chose the same construct to go national as did Lendingclub in December – both partnered with WebBank, Utah.

All loans originated through the Prosper marketplace are made by WebBank, a Utah-chartered Industrial Bank. Prosper provides services to WebBank in connection with the origination of such loans and Prosper services loans made to Prosper borrowers on behalf of registered Prosper lenders who purchase such loans.

This step has good potential to multiply the monthly loan volume originated by Prosper, as chances for obtaining a loan were in the past harmed in some states by low state interest rate caps (especially for lower credit grades).

Boober quarreling with regulator

Dutch p2p lending service Boober.nl is quarreling with the regulating authority AFM. The AFM argues Boober needs a licence because it allows lenders in peer to peer lending to engage in commercial activities.

Boober CEO Guus Drijver denies that. He says that lenders can lend out only a maximum amount of 39000 Euro and even with an assumed interest rate of 10%, 3900 Euro profit per year could hardly be seen as commercial activity.

(Source: sprout.nl)

Prosper sees federal license as long term goal

Following up on my previous post there now is a statement by Andrew, an employee of Prosper stating:

Our long-term goal, however, is to get a federal lending license. It will solve a lot of problems for us (state rate caps, primarily), but is simply harder to get. Nonetheless, it is something that we are pursuing aggressively. As with just about everything else we do, unfortunately, I cannot give you a specific date. Please understand that it is a huge priority for our business, and we are ushering the process as quickly as we can (unfortunately, it's more a process of waiting on regulators than us actually doing things proactively).

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.