P2P Lending Gets a Boost from the House


Peer-to-peer lending services like Prosper got a new lease on life from the House of Representatives today, which included an amendment to move regulation of the space from the SEC to a new banking regulatory agency in a major financial reform bill.

Previously the SEC had claimed regulatory oversight over P2P lending, forcing services like Prosper to shut down while undergoing a process to register its loans as securities. The regulatory mess effectively stunted the nascent market; while Prosper and Lending Club made it through, Zopa decided to pull out of the U.S., and smaller services shut down or have yet to be approved.

However, if the Senate and President Obama approve the legislation, by next spring peer-to-peer lending could be overseen by the new Consumer Financial Protection Agency. Sure, it’s just swapping in a new regulator, but Prosper CEO Chris Larsen said he thinks it’s a better fit than the SEC, which is built to regulate investors, not borrowers.

Larsen, who saw his company go dark for nine months from October 2008 to July 2009, told us he’s ecstatic about the bill’s passage. “It declares that peer-to-peer lending is not a security, which we think was very obvious in the first place,” he said. Prosper was able to make it through because it had raised $40 million in funding from investors like Accel Partners, Fidelity Ventures and Benchmark Capital, but the shutdown was “quite painful and very expensive,” said Larsen. Now, with the legislation on the books, Prosper feels confident it can go out and raise more funding.



@ Liz Gannes — If you want to know why knowledgeable lenders think Prosper is “shady,” I suggest you spend a little quality reading time at prospers.org.

No more Prosper

Ken, If a negative return on investment is in the 10-11% range, I think you can solve health insurance and California’s budget problems. You go!

Second, Prosper’s dealings with its BORROWER community may have been above board (depending on what the definition of above board is!). Its dealings with its LENDING community have gotten it into a well-deserved class action pending in San Francisco Superior Court. Prosper has changed the rules on lenders so many times that anyone foolish enough to make loans through it deserves what they get.

Warning to potential lenders: Prosper is asking people to make unsecured loans to it, which, in turn, Prosper loans to people with very little investigation into their identity. If the borrowers don’t repay, or if Prosper goes under, you get nothing. One of the huge failings with Prosper is collections. Prosper doesn’t care, so neither do the borrowers.

Save your money, or donate it where you will get a tax deduction. Check out ericscc.com for stats of Prosper lenders to see how (poorly) we’ve done.

Ken Kurson

I have been a Prosper lender since its inception (about $200k), as well as a group leader (Tzedakah group) and an occasional borrower (Vespa that I just HAD to have). My experience with Prosper has lived up to every possible expectation. Firstly, my returns have been somewhere in the 10-11% range. Secondly, after a few user hiccups like a hundred years ago (ie 2006ish), the sensibility and interface have been outstanding, essentially perfect since customer service was moved back on shore. Most importantly, for a company that essentially created the domestic P2P experience, Prosper’s dealings with its community have been incredibly responsive and above board. Like a lot of lenders, I have felt “stung” when someone I trusted enough to loan money to disappeared without making a single payment. And of course I would have loved to see a secondary market develop earlier. But given the complexity of creating an entirely new marketplace — and the world of good Prosper has done for both borrowers and lenders — these are quibbles. On balance, the social and financial good that’s been committed during its brief lifetime, as well as the herculean task it’s accomplished as a small company introducing the biggest banking paradigm shift since the Great Depression, make Prosper.com one of the most uplifting success stories in e-business history.

Allen M.

Thanks for illuminating what sounds like a positive development. I was perplexed by Prosper being out of the game for so long – seemed ridiculous that the SEC was bothering with P2P lending when it should have been focused on Madoff. Was very happy when they were back up and running as Prosper was the only part of my investment portfolio that didn’t lose money. And the company was already fully transparent, so I still don’t understand what the SEC has brought to the table in terms of disclosure.

Prosper Lender

Sadly, regulation for INVESTORS is exactly what Prosper needs – and it was with good reason the SEC shut them down.

Prosper has become an incredibly risky place to invest and the company is about as shady as they come. Prosper makes credit card companies appear like nice ethical people in comparison.

Liz Gannes

It does seem like the company has gathered a lot of haters in its short life. Why do you think they are shady? What is a better alternative?

No More Prosper

Liz, thank you for questioning. Prosper keeps changing the rules on the lenders. Once upon a time, there was enough information for lenders to point out borrower fraud. Prosper changed the rules so that no personal information was available (including city of residence), in a transparent effort to prevent lenders from discovering borrower fraud. If no fraud, Prosper wouldn’t have to honor its identity theft guarantee. (How hard is it, really, to obtain a loan in your ex-spouse’s name if there’s no real verification?)

Prosper changed the rules to allow second loans, increasing the risk to lenders.

Prosper tried to surreptitiously change the terms of service, without notifying any of the lenders.

Prosper filed a number of “new agency test” lawsuits, against carefully selected defaulters. Prosper has dismissed 90% of the lawsuits and, if I remember correctly, did so without serving many of them. This resulted in total losses to the lenders who had opted in to these test lawsuits in the hope of collecting.

Prosper said it would sell defaulted loans to junk debt buyers. Prosper unilaterally stopped doing that, even though its terms of service required it to do so. So, my old loans are just gathering dust.

Prosper does nothing that I know of to follow up on bankruptcies. Several of my borrowers filed ch 11 or 13 bankruptcies, more than a year ago, and I’ve received no payments. I have no idea if Prosper has done ANYTHING to protect my interests in these bankruptcies.

In short, Prosper doesn’t notify me of anything, even though it has my money. I think that’s shady.

Oh, another point. Prosper advertises these amazing returns, and the advertisement is just plain wishful thinking (completely and utterly false) based on Prosper’s actual experience.

The better alternative is not making p2p loans unless they’re guaranteed somehow. I’m not familiar enough with Lending Club to comment on the risk, but the risk of Prosper is just not worth it.

Comments are closed.