Ah, it's nice to be among the funded (see note 1). Not only can Lending Club afford to push forward with the usual marketing programs such as Google AdSense and affiliate deals, it can support unique efforts such as UnCrunch America and support for self-directed IRAs.

The IRA option, launched today (press release), primarily appeals to serious investors, given the $250 annual maintenance fee (waived the first year) from sponsor EntrustCAMA. The EntrustCAMA IRA allows tax-deferred investments in a variety of assets including single-family homes, private equity, and so forth.

Interested parties can complete the IRA form directly on the Lending Club site. However, the form must be printed and mailed to EntrustCAMA (see landing page below)

Bottom line: While self-directed IRA investors have historically chased higher-yielding investments than the single-digit returns expected from P2P installment loans, in today's environment there should be more interest in the relatively low-risk consumer loan portfolios available through Lending Club. 

Lending Club self-directed IRA landing page (link, 25 March 2009)

Notes:
1. Last week, Lending Club announced a $12-million series-B round of funding.
2. Lending Club will be appearing at our April 28 FinovateStartup conference.

UnCrunch America, the peer-to-peer lending educational/marketing campaign spearheaded by Lending Club (note 1) got a big boost with the addition of Virgin Money USA.

Not only does Virgin brings its considerable brand recognition, it legitimizes the effort as a true cooperative project, and adds a huge new category to the site, home loans. Plus, they get a much bigger number to put on the top of the homepage (below): $74 million instead of $1 million.

Other financial services participants include: Credit Karma (note 1), On Deck Capital and Geezeo. The campaign has its official launch today, although the website has been active since December (previous post).

The timing of the UnCrunch launch is perfect, following President Obama's assertion last night that lending was the "lifeblood" of the economy. All active lenders, especially credit unions, should consider joining this effort or using similar themes in their marketing.

UnCrunch home page (25 Feb 2009)

Virgin Money UnCrunch landing page (link, 25 Feb 2009)

 Notes:
1. Lending Club and Credit Karma will be participating in our upcoming Finovate Startup conference April 28 (see full lineup here).
2. For more info on the market, see our Online Banking Report on P2P Lending.

During the Christmas holidays, Lending Club and its partners launched a clever new microsite, UNCRUNCH AMERICA at <uncrunch.org>. The site promotes peer-to-peer lending as a way to help increase the availability of credit in the United States (see screenshots below).

Joining the effort are four others:

• Credit Karma, a provider of free credit scores (coverage here)
• Geezeo, an online PFM (coverage here)
• On Deck Capital, a small business finance specialist
• ChangeWave, an investment research and publishing company owned by InvestorPlace Media

The site explains the concept behind peer-to-peer lending and funnels visitors to Lending Club or On Deck Capital to borrow. Lending Club was promoting the site on its homepage (see third screenshot), but it's no longer mentioned. And none of the other partners mentions it on their sites.   

The site consists of just two pages, the homepage and a Learn More page listing the partners. The homepage uses Flash to deliver five different messages. The red action buttons lead to a special landing page to Lending Club (see third screenshot).

According to American Banker, Lending Club hired Tobin Smith, the chairman of ChangeWave Research, to create the campaign.

Analysis
Overall, I like the UNCRUNCH idea. It's timely. It has a catchy name. And it resonates with consumers. But companies must be very careful using consumer advocacy as a marketing strategy. While most consumers understand the need for the sponsor to make a buck, they can see right through anything that appears overly self-serving.

In financial services, credit unions have a distinct advantage here. As member-owned cooperatives, their consumer advocacy messages are believable. Shareholder-owned banks have less credibility, but can still pull it off if they back up their words with a record of action.

I think that's why ING Direct's We the Savers campaign works (see previous post here). For its entire eight years in the United States, the bank has consistently promoted savings and thrift. So few question its motivations behind the We the Savers petition drive, though clearly it supports the bank's for-profit savings program.

On the other hand, UNCRUNCH AMERICA was a bit misleading when it first launched (see first screenshot below from Jan 7). But with the recent improvement in disclosing the site's purpose and primary sponsors, I think it's acceptable now (see second screenshot below from Jan. 19).

Here are the main improvements:    

• It wasn't clear that the primary sponsors were lenders. But the new site includes Personal Loans and Small Business Loans sections that clearly disclose the Lending Club and On Deck Capital involvement. There is also new fine print at the bottom of the page that further identifies the sponsors.
• The original copy made it sound like a completely altruistic effort with its main pitch, Invest in America. That section has been completely removed and the site no longer solicits investors/lenders. It's clear now that the site is designed to generate loan leads. The main button on the homepage was changed from Invest in America to I Need a Loan.

I'm relieved that UNCRUNCH.org has stepped up its transparency. At this point in the financial mess, we need lenders and other financial entities to be totally upfront with the public so as not to invite even more regulation than what is already coming. Given its six-month hiatus in 2008 while it revamped to comply with new SEC requirements, Lending Club should understand that better than most.    

Other financial institutions should consider similar cooperative efforts in their local areas. The public could use some positive messages from the banking sector. 

1. UNCRUNCH AMERICA homepage before improvements (7 Jan. 2009)

2. Homepage after transparency improvements (19 Jan. 2009)

3. Lending Club homepage featured UNCRUNCH button (7 Jan. 2009)
but it has since been removed

Note:

1. For more info, see our Online Banking Report on Peer-to-Peer Lending. 

If you think your 2008 was stressful, imagine having to shut down for an extended and unknown period (it turned out to be 6 months) just 10 months after launch. Then spending hundreds of thousands of dollars on SEC paperwork that your major competitor avoided (temporarily it turns out), all the while watching that same competitor take your market share while you keep your mouth shut via SEC mandate.

That was Lending Club's year. But unlike so many horror stories of the past year, this one has a happy ending, at least so far. Not only did Lending Club reopen for business Oct. 14 at our Finovate conference (demo video here), within weeks they had already moved ahead of last year's origination pace (note 1).

As you can see in the table below, Dec. 2008 was substantially ahead of Dec. 2007 in all measures except average loan size and approval rate, which dropped a full 2 points:

• Number of applications increased by 78%
• Number of approved loans increased by 43%
• Dollars originated increased by 29%
• Average loan size approved declined by $1,000 (9.4%)
• Overall approval rate was 8.5% last month compared to just over 10% a year ago

Table: Lending Club loan origination results: Dec 2008 vs. Dec 2007

Source: Loan volume from Lending Club, site traffic from Compete, calculations by Online Banking Report, 8 Jan 2009

Here's the monthly origination chart (in US Dollars) courtesy of LendingClubStats.com who compiled the figures from data provided by Lending Club. 

Source: LendingClubStats.com, 8 Jan 2009

Also, site traffic is up 35% year over year according to Compete. 

Source: Compete, 9 Jan 2009

Notes:
1. The number/dollars of loans originated and applied for at Lending Club in Oct. 2008, Nov. 2008, and Dec. 2008 were all higher than the respective months in 2007. 

2. For more info on the market, see our Online Banking Report on P2P Lending.

Dear Mr. Cox:

I don't have to tell you that the Madoff mess has dominated the Wall Street Journal headlines for the past few days. You probably saw Jane Kim's recap today tallying the $25 billion in known losses so far in a wide-reaching, long-running fraud perpetrated by a firm overseen by your agency.

It's not that I blame you for the Madoff fraud. The cops can't catch every crook. But now that you have your hands full with this matter, I have an idea as to how you can free up some staff resources to sort out the mess Mr. Madoff left.

You've probably been too busy to read Netbanker (see note 1), but if you had, you'd know that I haven't been very happy with the way the U.S. peer-to-peer lending industry has been treated by the SEC this year. Thanks to your agency's efforts, the three major providers have all been shut down for extended periods and several others have been dissuaded from opening at all.

Currently, just a single company, Lending Club, remains in operation, but they were crippled much of the year by a dark period as they spent hundreds of thousands of dollars meeting SEC registration requirements. Thankfully you approved their registration statement and they are now open for business, albeit weighed down by massive ongoing reporting requirements. 

As recently as last year, we had as many as a dozen companies in various stages of launching companies in this space. The goal is to connect people with excess funds to those in need of money with a fair rate of interest established via open bidding in a transparent market. What more can you ask for? 

And even before the SEC became involved, it's not like these companies were skating by with no regulation. They spent considerable time and money obtaining lending licenses in individual states and/or working with existing regulated financial institutions to originate loans. In addition, the startups all had to comply with a myriad of federal consumer protection statutes. In fact, you could say they were already operating as highly regulated companies.

The biggest of the group, Prosper, even made all its data available to the world including the good, the bad, and the very, very ugly. They could very well be considered the first open source financial institution in the world. Their unique transparency gave us all a ringside seat to watch the ebb and flow of a new market gaining traction. 

No, Mr. Cox, it has not been a smooth ride for Prosper. More than 20% of the loans made the first year have already gone bad, and ultimately the losses may end up above 30%. But with an average interest rate of 17% on the 70% of the balances ultimately repaid, most lenders will get most, if not all, their principal back from their speculative bets. That's a better return than blue chip stocks over the same period. And I'm sure the investors in Madoff Securities would be happy with to have 98% of their principal returned.

But even before the SEC got involved in P2P lending, things were improving for lenders. The open market fostered quick learning as lenders learned from both from their own mistakes and those of others in the community.

And the exchange operators were learning even faster. Prosper now makes much more borrower info available and began verifying certain applicant statements. As a result, returns appear to be improving. Although, against the backdrop of a severe recession, it's hard to make good comparisons.

Had these companies been left alone, journalists would be writing stories about how P2P companies were stepping into the lending void left by the turmoil in the banking sector. And how wise the U.S. regulators were in letting this new area thrive amidst the collapse of HIGHLY REGULATED financial companies around the world.

But instead, the SEC decided it needed to keep closer tabs on the tiny $100 million annual volume originated in these markets (that's just a single day's worth of fraud by Mr. Madoff). Your agency came to the surprising conclusion that loans, made between individuals in a regulated peer-to-peer market, are securities and needed SEC oversight. And based on recent events, what exactly does that even mean? Besides requiring a flood of documents uploaded to your servers, are you really going to assign an agent to watch over these $3,500 loans. I don't know what your 2009 staffing plans are, but I'm guessing everyone will still be pretty busy.  

The decision to classify these loans as securities will ultimately cost Prosper as much as $10 million, a potentially fatal blow. Prosper has been shut down as it goes through the SEC-registration process. The SEC ruling has already cost the company at least $2 million in cash: $700,000 just to create the documentation for your agency to review, $1 million to pay-off state securities regulators, and an undisclosed amount to settle with your agency. And the company must still settle or fight the class-action suit, where lenders, who knew perfectly well the risks they were taking (Hello... they were lending to strangers on the Internet!), will try to win back their loan losses by asserting that Prosper was selling unregistered securities.

Furthermore, you are driving innovation and competitors out of the market. The original pioneer in the industry, Zopa, withdrew from the U.S. market, despite a thriving business in the United Kingdom because of the threat of SEC registration. End result: There is just a single U.S. P2P loan exchange operating today. Had you stayed out of it, we'd have at least five, probably more. 

I have this to say to the SEC:

• Rethink your oversight model: We've seen hundreds of billions lost by SEC-regulated companies this year. You weren't even able to sniff out a $50-billion Ponzi scheme in your own backyard. Maybe you don't have enough resources. I buy that. Even mammoth funds with virtually unlimited resources were duped by Madoff. So let me ask the obvious question. If you are short on staff, why are you wasting them on controlling the $100-million P2P market where every bid, loan, and repayment are open to scrutiny by the community. 
• Embrace openness: Instead of stomping on a new, open and self-regulating market, maybe you could learn from it. As Don Tapscott proposed in his BAI Retail Delivery keynote last month, let's open source financial holdings. If Madoff had made his trading data public, his customers could have monitored the flow themselves, and figured out about $49.9 billion dollars ago that he was fabricating his results. 

Bottom line: Leave the P2P lenders alone. Their open approach reflects an order of magnitude far better than the broken regulatory model employed on Wall St.

Regards,

Jim Bruene, Editor & Founder
Online Banking Report & Netbanker.com

<whew!...stepping off soapbox>

Note:
1. In the spirit of openness, Prosper, Lending Club, Zopa, Loanio, Pertuity Direct and other P2P startups are customers of ours, buying research reports and admission to our events. But the total gross revenues from the sector amounted to less than 2% of our total revenues. We do not invest in any companies we cover, nor do they pay us for consulting, or influence our editorial coverage in any material way. 

It's 3 for 3 now. All major P2P U.S. peer-to-peer lenders have been shut down this year by the SEC (see note 1). First Lending Club in March, then Prosper Oct. 15, and finally Loanio this week (see note 1).

Here is the statement I received from Loanio founder Michael Solomon this afternoon:

In light of the recent cease-and-desist ruling issued to Prosper Marketplace by the Securities and Exchange Commission, Loanio voluntarily suspended its operations. We were not contacted by the SEC or any other government agency. The SEC ruling on Prosper, combined with the recent registration of Lending Club, removes all ambiguities as to the Commission's legal interpretation on the issue of whether P2P promissory notes, in all of their varieties, are considered securities under current law.

Regulators have concluded that loans created in these networks are, in fact, securities and must be registered as such. You can read the SEC's logic in its Prosper filing published this week (here).

I have mixed feelings. While I applaud regulators for taking the initiative to understand this new way of lending/investing, I find it a bit ironic that a $100-million self-regulating and relatively transparent marketplace receives heavy-handed treatment while multi-trillion dollar financial products grew relatively unchecked in recent years (see my prior editorial on the matter).

The good news is that Lending Club has proven that SEC registration need not be a death sentence. The startup successfully completed the registration process after six months, relaunching at our Finovate event Oct. 14. The company has funded $2.6 million in loans since reopening.

We are hopeful that Prosper, which has $40 million in venture funding, will be back in business in early first quarter. Angel-funded Loanio may need to raise money to finance the registration process.

Notes:
1. Last month (here), the Loanio founder predicted that at some point he'd also need to register with the SEC.

2. Fynanz and GreenNote, the P2P student loan lenders, appear to still be accepting lender funds.

Industry blog, P2P-banking.com recently compiled a list of peer-to-peer  loan volumes from around the world. The chart is reprinted by permission below.

These numbers are cumulative, all-time volumes since inception. More than half is from Virgin Money USA which has helped individuals put $370 million in loans together since it began as Circle Lending in 2001.

Because these companies don't all use the same model, I've revised the tables somewhat, excluding: 

• Facilitators: My definition of peer-to-peer lending excludes Virgin Money and Loanback because they do not serve as matchmakers (note 1). They do play a crucial role in putting a legal framework in place for friends-and-family loans and often end up servicing the loans as well. They are more like PayPal where Prosper/Lending Club are like eBay.
• Microfinance markets: I would exclude Kiva as well. It's an awesome platform that allows U.S. citizens to loan money to third-world merchants at zero interest. A powerful tool for philanthropy, yes, but not really peer-to-peer. The same goes for MyC4 and Microplace.

So excluding the above companies, total worldwide originations are $262 million, with two-thirds of that from Prosper.

Here are the market shares of the 8 true P2P lenders that have originated more than $1 million since launch:

Source: P2P-Banking.com, 28 Oct 2008

Note:
1. This does not mean I dislike Virgin Money's business model, just that its loan volume is not comparable to the others on the list.

2. For more info on the P2P lending market, see our Online Banking Report on Person-to-Person Lending

I was packing up my hotel room after five great days in NYC putting on Finovate, when I got a call from a reporter who asked me if I'd "heard the news." Since we'd been talking P2P lending earlier in the week, I figured his question was related to that. But I couldn't imagine what news could compete with the launch of Loanio, the closing of Zopa (US), the delayed launch of Pertuity Direct, and the grand reopening of Lending Club. That was already a full year's worth of major developments packed into a two-week period. 

So I about fell off the bed when he told me Prosper had closed off new lending until the completion of its SEC registration process, entering the same regulatory twilight zone from which Lending Club had just emerged the previous day. And this was only 14 hours after Chris Larsen had been quoted in an upbeat Prosper company blog entry about the role of his company during the credit crunch (note 1):

"At a time when every sector in the economy seems to be under pressure and shrinking, the growth Prosper has experienced is very respectable."

Impact on Loanio
Because I'd just spent an hour with Loanio founder Michael Solomon the day before at our Finovate conference, I immediately wondered if he might be facing the same registration hurdle. But I reached him a few minutes ago via email and he's thinking this probably benefits his new marketplace since lenders are frozen out of Prosper. He also doesn't expect to enter into a similar registration process in the foreseeable future.

Here's his full statement:

"...from the perspective of (Prosper) going silent, it is actually great for us as I think we will quickly gain lots of lenders and hopefully we can wow them into sticking around. From a regulatory standpoint, we believe that at some point we will seek to introduce a secondary market platform, but we will focus the greater part of the next 12 months on building our platform and seeking out a national bank partner to cover the rest of the U.S. Our plans for a secondary market are too far ahead for me to contemplate at this time."

Thoughts
Regulators certainly have a right to require transparency in the marketplace and protection for consumers. But Prosper, with an open API of its transactions, balances and even repayment behavior, and which uses a completely market-driven, open-bidding process to set rates and select loans to fund, is about as open a business as you ever will see, especially in financial services.

For the sake of the nascent industry, I hope the registration is put on a fast track and Prosper is back in the game faster than the six months Lending Club waited. At this point, an alternative credit supply, albeit only $100+ million per year right now (note 2), sourced directly from willing individual investors and not from capital-constrained financial institutions, seems like something we should encourage.

Ultimately, Lending Club and now Prosper should benefit from improved liquidity that the secondary market allows. Since Prosper is not allowed to comment on the move, we can only speculate on what happened. But the timing of all this seems a bitter irony. Wasn't a breakdown in the secondary markets a big part of what put us in such a bind now? 

According to its blog, Prosper will continue to make loans "through alternative sources (of funds)" (note 3). So perhaps the impact to the Prosper marketplace will be small. Especially if they are back in full swing by year-end or early 2009.

Notice on Prosper's website announcing quiet period (isn't that an oxymoron?) 16 Oct. 2008

Notes:
1. See today's NY Times article for more info on this week's developments. Don't miss the picture of Lending Club CEO Renaud Laplanche standing outside the Finovate 2008 demo hall.

2. For more info on the market, see our Online Banking Report on Person-to-Person Lending. 

3. Presumably, to keep the loans flowing, Prosper can tap its own funds as well as those of institutional investors or other professional investors. We'll know soon, thanks to its open API.

Next is Lending Club. CEO Renaud Laplanche will do the demo.

Lending Club was the second person-to-person lender in the United States, launching on Facebook in May 2007 and on the Web in September. It's been operating on a limited basis since March as it sought SEC registration for its loans. The company presented at the first Finovate last year. 

What's new
Lending Club is back online as of today. The company received approval of its registration documents with the SEC. They are the only P2P lender to have a trading platform, i.e., a secondary market enabling lenders to resell loans they've made through the Lending Club platform. The platform is powered by Foliofn.

They have been experiencing a 2% default rate and have been approving 14% of applications received.

Lending Club showed tools that allow lenders to select a desired portfolio of loans based on various risk criteria.

Now that we are well past the mid-point of 2008, it's a good time to look at where we are with one of the most talked-about online financial subjects of the decade: person-to-person or social lending.

Currently, two U.S. companies are actively originating unsecured, multi-purpose P2P loans (note 1): 

• Prosper: Through July, the leader in the market is running 10% ahead of its 2007 loan-origination pace. The company has funded $55 million and is on pace to do just under $100 million for the year. Website traffic is up 15% compared to a year ago (see graph below) and through July there have been 13% more loan listings (see previous coverage here, Finovate 2007 Best of Show video here; monthly volume reports here).
• Zopa: The company, which isn't technically person-to-person (the loans are originated by six credit union partners) but definitely has a social aspect to its loan program, has not revealed any numbers, but they list 475 loans on the "browse all borrowers page." Assuming average loan size of $8000 to $9000, they are doing less than $1 million per month. Zopa is using Google AdWords to pitch "instant approval" with a credit score of 640+ (see screenshot below), an aggressive marketing move, especially combined with the 8.49% APR touted on the landing page (see screenshot below; previous coverage here; FinovateStartup 2008 Best of Show video here).

In addition, three more P2P lenders appear very close to launching or relaunching:

• Lending Club: The company, launched in May 2007, has been essentially closed to new business since March as they retooled loans into securities for regulatory reasons. However, the company is scheduled to present at our Oct. 14 Finovate conference, implying that they will be out of their quiet period by then (previous coverage here; Finovate 2007 video here).
• Loanio: The startup appears to be very close to launching based on an a Sept. 3rd email sent to its house list announcing the launch "in just a few weeks" and adding in parenthesis (yes, we mean it this time!). The company will likely be the first to offer a co-borrower loan application (previous coverage here; Finovate Startup video here).
• Pertuity Direct: The newest competitor in the space is Pertuity Direct which we wrote about last week. Its website claims a Sept. 15 launch, and we look forward to seeing their first public demo at Finovate on Oct. 14.  

Finally, several companies are looking to launch P2P services in 2008 or 2009, including Globefunder, Community Lend (Canada) and one we just heard about today, Swap-A-Debt.

Forecast revision
Last December we published our second detailed Online Banking Report on Person-to-Person Lending. In that report, we predicted just under $200 million in originations this year. However, due to the inactive period at  Lending Club, the delay in Loanio's launch, and the more conservative approach by Prosper lenders, we are lowering the 2008 forecast by 25%, with an expected total of $135 to $150 million for the year as follows:

• Prosper ($95 to $105 million)
• Lending Club ($25 to $30 million)
• Zopa ($5 to $10 million)
• Loanio ($1 to $5 million)
• Pertuity Direct ($1 to $5 million)

P2P lending traffic from Compete (July 2007 through July 2008)

Zopa AdWords ad on "loanio" search
(4 Sep 2008, 1 PM PDT from Seattle IP address)

Landing page (4 Sep 2008, link here)

Notes:
1. Specialists are involved in the student loan piece (GreenNote and Fynanz) along with Virgin Money and Loanback which help with person-to-person loan documentation and servicing. 

2. Top-right graphic from April 2008 ABC News segment on Lending Club and person-to-person lending.

Lending Club filed an amended S1 statement, a positive sign that it is moving through the registration process in a timely fashion.

As we noted here after reading the original S1, Lending Club has indeed added a secondary marketing piece to its business plan. Holders of its notes (aka individual lenders), will be able to sell their Lending Club loans through a market run by an undisclosed third party.

Here's the pertinent section from pp. 50-51 of the August 1 S1 (note: the name of the partnering broker-dealer is not disclosed; hence, the blank space below):

Trading System
Lender members may not transfer their Notes except through the resale trading system operated by           , a registered broker-dealer. This trading system is an Internet-based trading system on which Lending Club lender members who establish a brokerage relationship with the registered broker-dealer operating the trading system may offer their Notes for sale. In this section, we refer to lender members who have established such brokerage relationships as “subscribers.”

Subscribers may post orders to sell their Notes on the trading system at prices established by the subscriber. Other subscribers will have the opportunity to view these prices, along with historical information from the original loan posting for the member loan corresponding to the Note, an updated credit score range of the borrower member and the payment history for the Note.

I skimmed the updated S1 and didn't see anything else particularly noteworthy. Another blogger, Doughroller.net, noted that the company is adding more credit factors to its loan-pricing model. You can see the new formulas in the S1 filing (pp. 36-38).

No one said it was easy being a startup, especially a "Web 2.0 lender" in the middle of major credit turmoil. Lending Club, which had to shut down the retail lending portion of its service in April, is preparing to put the second P back into its P2P loan service (see note 1).

A big part of that process is filing with the SEC so the company can sell retail securities backed by its loans. For lenders, it won't be much of a change. The securities will be backed by the individual loans, just as if it were a standard loan. And at least initially, the securities cannot be resold. However, in the filing, Lending Club says it is planning on creating a secondary market for the securities through its platform. 

Lending Club posted an update on its website announcing the filing.

Lending Club discloses $500,000 monthly burn rate
Luckily for the company's followers, and competitors, the S-1 filed Friday (20 June) sheds light on what would usually be known only to its investors and creditors, the privately held company's inner finances. The company disclosed that during the fiscal year ending March 31, 2008, it experienced:

• negative cash flow of $6 million
• total net loss of $7 million on revenues of $450,000; the revenue total includes $200,000 in interest on deposit balances   

Lending Club itself is a significant lender on the platform
Another interesting disclosure: More than half the loans originated through the Lending Club platform have been funded by the company and its creditors/investors, even before it had to stop taking new retail loan commitments April 7.  That's an interesting dynamic for a so-called person-to-person lender. Because Lending Club sets the market clearing rates, its funding did not compete directly with the retail lenders, i.e., Lending Club stepped in to help fund deals that retail lenders had not fully funded. However, had the company not put so much money into the system, borrower rates could have floated higher, potentially increasing lender yields (note 2).

As of June 10, 2008, only $6.4 million of the loans made through the platform have been to "retail lenders." Later in the S1, Lending Club discloses that it has funded $7 million of the $15 million loaned through the platform as of March 31, and then $1.6 million of the $3 million loaned after March 31. That leaves Lending Club holding $8.6 million of the $18 million loaned through the platform.

The lending was financed primarily through loans from Silicon Valley Bank ($3 mil), Gold Hill Venture Lending ($5 mil). Also, through March 31, company insiders and investors had lent about $0.5 million.  

Other stats from the S-1
Other numbers (as of 31 March, 2008, unless indicated otherwise):

• $1.8 million spent on marketing, of which $270,000 was advertising
• $1.8 million spent on engineering
• 23 full-time employees
• Average loan amount per borrower is $9,100
• Number of loans = 1,669 worth $15.2 million (through 10 June 2008)
• 150,000 website visitors in March
• Average amount lent per loan per lender = $75
• 50% of loan volume has been through LendingMatch that automates the process
• $8.9 million had been outstanding for more than 45 days and had been subject to at least one billing cycle; of that amount, 98.3% was current, 0.88% was 15- 30 days late and 0.87% was more than 30 days delinquent. No loans had gone into default which is 120+ days delinquent
• On p. 48 is a detailed table of home ownership. job tenure, annual gross income and debt-to-income ratio by Lending Club credit grade

Loan purpose:

• 50% refinancing high-interest credit card debt
• 35% financing one-time events such as weddings, home improvements or medical
• 15% small business financing

Notes:
1. For more info on person-to-person lending see our Online Banking Report #148/149

2. I say POTENTIALLY increased yields. That would depend on whether the borrowers accepted loans at higher rates. And higher rates would lead to lower volumes, so even though interest margins would be higher, there could be substantially fewer deals. And that also increases the risk of adverse selection with only higher-risk borrowers accepting the higher rates.

Breaking news: P2P lender LendingClub, which had been gaining ground rapidly on industry leader Prosper (post here), stopped accepting new money for lending through its platform. The company says it will continue to accept loan applications, funding them out of its own account. There is no indication whether the company has secured additional funding to maintain or grow its current $4 million per month origination pace. It's feasible that a bank and/or private investors could step in to fill the void. Some speculation here, here, and here (includes reprint of the email sent to lenders from the company). 

I logged into my LendingClub account, which has a small cash balance, and found that the lending function has been disabled. I could browse loans and withdraw my money, but I could not bid on loans or add new funds. A message appears on most screens telling users they cannot make new loans at this time (see screenshot below).

The company's blog entry dated 7 April (see below) from founder Renaud Laplanche, offers few details, saying the company has:

...started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold ... through our site in the future.

Furthermore, due to the registration period:

....the company will undergo a quiet period, and will not be able to respond to press and other inquiries...

Depending on how the promissory notes are structured, they may or may not be a departure from the P2P lending model currently employed. We'll update this post when we get more information.

For more information on the person-to-person lending market, see our recent Online Banking Report.

Update 8 April, 11 AM Pacific: Prosper's statement:

Person-to-person lending is an increasingly popular way for individuals to borrow and lend money at attractive interest rates. Understandably, it must be done in a secure and trusted way. While we’re not in a position to comment on another company’s regulatory stance, Prosper believes that the way we have structured the Prosper marketplace is in compliance with applicable state and federal laws. Currently Prosper has over 650,000 members, and more than $130 million in loans have funded through the Prosper marketplace.

Last week's post on P2P lending traffic prompted several comments on how worthless website traffic is as a metric, especially when the two major players make their loan-production numbers public. With that in mind, I present the Q1 total loan production for Lending Club and Prosper.

While Prosper still had twice the overall loan volume of Lending Club in Q1 ($21 vs. $10 million), Lending Club is closing the gap in the prime/near-prime market (FICO 640+) originating two-thirds the volume of Prosper in March ($4 vs. $6 million). But if you take into account Lending Club's more stringent debt-to-income requirements (max 30%), the newcomer actually surpassed Prosper in these lower-risk loans ($4.1 vs. $3.7 million in March).  

While the two-horse race is an interesting sidelight, the more important statistic is industry growth. In Q1, Prosper and Lending Club combined for more than $30 million in originations, up $10.7 million (55%) compared to about $20 million in Q1 2007. Only $3.4 million of the Q1 total (17%) was subprime, compared to $7.0 million (36%) a year ago.

Loan originations doubled in the prime/near prime (Prosper grades AA to C and all of Lending Club) ending the quarter at just under $27 million.

Why so much attention to a tiny sliver of the $2.5 trillion U.S. consumer loan market? It's new. It's different. It's social. And it's an experiment in online finance we get to watch in real time thanks to the transparency of the lenders. For more info on the market, see our recent Online Banking Report on P2P lending.

Q1 2008 Loan Volume: Prosper vs. Lending Club
in $ millions (U.S. only)

Source: Online Banking Report compilation of company data, 2 April 2008
*Loans made to Prosper grade AA through C borrowers (FICO 640+)
**Loans made to Prosper grade AA through C borrowers with debt-to-income (DTI) less than 30% 
***Lending Club only makes loans primarily to the "prime/low DTI" segment (FICO 640+, DTI <30%)

Note:
1. These prime/near prime/subprime distinctions can help financial institutions compare their prices to the marketplace rates.

Looking at February's Compete data, estimated traffic (see comment 3) at the three major U.S. person-to-person lenders grew by approximately 100,000 unique users compared to January, a 16% gain. Prosper still dominates the category with nearly 10 times as many unique visitors as its nearest rival, Lending Club. 

Update: In terms of funded loans, Prosper had double the volume of Lending Club in February: $6.0 million vs. $2.9 million. In January, the volume was $7.2 million vs. $2.8 million.  

Source: Compete.com, estimated unique site visitors during Feb. 2008                                         *Not launched

For much of the past four or five weeks I've been researching and testing person-to-person lending sites. I've become a lender and have gone through the borrowing process at all three major U.S. P2P lending exchanges: Prosper, Zopa, and Lending Club. Plus I set up friends and family with loans at Virgin Money USA and LoanBack.

It was all part of the research process for the latest Online Banking Report entitled, Person-to-Person Lending 2.0: Disruptive service or market niche? That report is now available at our main website (here).*  

I had originally intended on publishing it in early December. But as I was trying to wrap things up, Zopa launched its new U.S unit. So I stopped the presses and added an analysis of its unique model. Then as I was finishing that, Lending Club made a significant change last week, becoming a national lender instead of state-sanctioned one. That too is now in the report. 

Here's a summary of the major fourth quarter activity in the person-to-person lending sector:

• Oct. 2: Prosper overhauled a number of its lending tools, which were announced at our FINOVATE conference Oct. 2 (video here) 
• Oct. 6: Virgin Money (formerly CircleLending) launched its revamped friends-and-family service with a splashy debut in Boston with Virgin founder Richard Branson leading the parade (coverage here)
• Dec. 3: Zopa launched its U.S. version, an entirely new way of looking at the P2P space (coverage here)
• Dec. 13: Lending Club went national in a unique partnership with WebBank

________________________________________________

*Subscribers may download the report free of charge.
Others may purchase it as an individual report.

As we enter the final week of summer, we will begin showcasing the companies that will be DEMOing new products and services at our inaugural conference FINOVATE 2007. See here for the complete lineup.

Person-to-person lending
P2P lending has grabbed headlines around the world since it launched in the the United Kingdom in March 2005 by Zopa. We are pleased to have on the FINOVATE agenda the two leading U.S. providers: Prosper, the brain-child of E-Loan founder Chris Larsen, and Lending Club, which launched its exchange on the Facebook platform just three months ago.

Both companies received significant cash infusions this summer and we're looking forward to seeing what enhancements the lenders will showcase at FINOVATE 2007.

Lending Club received a significant $10.3 million first round last week (blog entry here). Since the company's launch of Facebook three months ago today, it has closed 134 loans averaging approximately $5,600 for a total of $750,000 in originations.   

In June, Prosper, the winner of an OBR Best of the Web award last year (note 1), secured a $20 million third round bringing total funding to $40 million (previous post here). The company now has more than 380,000 members and has funded nearly 14,000 loans totally $80 million. Since inception, Prosper has posted more than 168,000 loan listings from more than 75,000 borrowers.  

Mortgage lending
Here's a bit of trivia for Monday afternoon (or Tuesday morning if you read NetBanker via email): What was the first profitable banking website? And no, this is not a trick question with the answer being "none" or "no one knows" (see note 1).

The answer: Bank of America in 1994, or at least that's what an exec told the audience at the first conference on Internet banking held in the summer of 1995. Practically before anyone outside of academia or Silicon Valley had heard of the Web, BofA was using it to produce mortgage leads in the lucrative California market. I can clearly remember the woman who ran BofA's website saying, "mortgage leads are already more than covering the bank's costs (of its website)." Of course, that was in the days when a website cost less than a couple billboards.   

We've been writing about online mortgage lending since that first 1995 conference. One of our favorite lending platforms, winner of the second mortgage-related OBR Best of the Web award in 2001, is MortgageBot. The company was also named to last year's INC 500 list of the nation's fastest growing private companies producing a 560% revenue increase during the YE 2002 through YE 2005 period. 

At FINOVATE 2007, MortgageBot will take the stage to show a radical new approach to mortgage shopping that its been testing for some time now. We can't release the details yet, but we were luck enough to get a sneak peek on Friday and were very impressed!

Note:

1. Our sister publication, Online Banking Report (OBR), typically names 6 or 7 companies as "Best of the Web" during the course of each year. It is earned by launching a product or service that significantly "raises the bar" in online delivery of retail banking and lending products.

Update July 30: I don't know if it was me or YouTube's search function (probably the former), but I missed at least six other entrants into the Lending Club contest. While I'm still surprised there are so few — as of 11 AM Pacific today, there are 10 total entrants here — that's MUCH better than three. What's more important: several are approriate and relatively clever. The current leader here, and probable winner, has nearly 5,000 views and will be hard to catch. Another thing I missed, the company DID put the contest in its blog here. I apologize for the errors.

Start-up, P2P lender Lending Club is sponsoring a user-generated video contest on YouTube. The most popular video wins $5,000, and in addition to its blog, the contest is also discussed in the lender's Facebook Group (screenshot below). Despite this exposure, the contest doesn't seem to be widely known. We read about it last week on a P2P lending blog called Prosper Lending Review.

Right now, it looks like someone's going to make off with an easy $5k. The contest, which began July 17, and ends on Aug. 10, has only two entrants posted on YouTube, at least using the correct tab "Lending Club." One is recorded so softly, you cannot understand a word of it, another features a guy reading website copy on his couch, and the last one is a dubbed-over 1-minute clip from the Hound of the Baskervilles. I don't want to skew the results by linking to them. Trust me, you don't need to watch them.

And since the winner is the video with the most cumulative plays on Aug. 10, new entrants have less than 2 weeks to rack up more than the 2,000 views of the current leader. 

A few lessons from this effort:

Lesson #1: While the contest is a great idea to generate low-cost buzz, and perfect for a Facebook-based app like Lending Club, the lesson here is that you need to run it longer so the contest can create its own viral momentum. Three and a half-weeks just isn't enough time for the word to get out to enough creative types and for them to get something interesting recorded, uploaded, and for it to catch on with YouTube viewers. In contrast, see our coverage of Intuit's TurboTax Rap which generated more than one million YouTube views (previous coverage here).

Lesson #2: Lending Club was apparently testing the power of FaceBook groups, creating a special one just for the contest called, "Lending Club Contest -- Win $5,000." The lender did not mention the contest (see update above) on its website. But unfortunately, the Facebook club has only 57 members after two weeks and doesn't appear to have the horsepower to spike enough word-of-mouth buzz on its own. I'm sure they will do it differently next time.

Lesson #3: You might want to include a clause in the contest rules stating that videos containing pirated content or profanity, are unintelligible or not understandable, are not allowed. That would eliminate all three current entrants. Here's the official rules posted at Facebook.

The social networking phenomena has entered a new phase: eCommerce. It has always been a bit hard to visualize mainstream businesses, like banks, book sellers, or phone companies making a profit on MySpace. It's been a great place for musicians and online dating companies to grab market share, but a MySpace Checking Account didn't seem just around the corner (see MySpace coverage here).  

All that changed May 24, when Facebook opened its network to outside developers, making its service more like Windows than MySpace. Already the service has grown by 3 million users, more than 10%, in the past 4 week, to 27 million (see Facebook profile in today's Wall Street Journal).

More interesting are the 893 new services have opened their doors on the platform. The most popular, Top Friends by Slide, already has 6.4 million users. Yes, that is no typo, in one month a Facebook service grew to more than 6 million users. With traditional marketing, it would have cost a bank or card company as much as $1 billion to attract that many customers assuming acquisition costs of $100 to $150 per new account. 

And it's not just the one app. A new Seattle-based music preference service, iLike, has added 3.8 million. There's not a whole lot happening in commerce apps YET, the first financial company with a service offering, Lending Club (see previous coverage here), is the most popular business app, with just under 10,000 users. That's about what iLike attracts in a busy hour, but for a financial services company, and especially a startup, that's huge, a grand slam using tired baseball metaphors.

For many reasons, it takes longer for traditional companies to pounce on new opportunities. But over the summer we'll start seeing hundreds of businesses launch on Facebook. By next year at this time, the Facebook apps directory will probably look like the New York City Yellow Pages (or at least San Jose).  

Financial Institution Opportunities

Searching the site, we only see four financial services that have launched on Facebook:

• Lending Club's person-to-person loan marketplace
• Prosper's lending game
• Wesabe's personal finance groups
• Pay Me, a payment service developed by Australian Ad Agency, Yellow Media using the PayPal engine (screenshot below, we'll provide more details once we finish testing it)

But so far there is no:

• Bank
• Credit union
• Credit card issuer
• Mortgage lender
• Brokerage (although there are several stock monitoring service including Forbes, Yahoo, and Social Picks)
• Rates tracking service
• Credit report monitoring service (though Identity Guard is advertising heavily today)
• Identity theft protection service

Let the race begin. But you better move faster than you've ever moved before, if you want to get the huge first-mover advantage on the Facebook platform. Good luck.

For more information, see our latest Online Banking Report, Social Personal Finance.

Just as we are putting the finishing touches on our latest Online Banking Report, which looks at the intersection of personal finance and social networks, a new person-to-person lender launches. And how do they plan to gain traction? Through tight integration with Facebook, the second-largest social network. So we are holding the presses, and adding this important new development to our upcoming report.

We'll have much more on it later, but if you are curious now, login to Facebook and check out Lending Club (the easiest way is to login via the link at the top of the Lending Club homepage). Or read Colin Henderson's great analysis here.  

Last year, Facebook developers created a proof-of-concept personal finance app, originally called Facebank, then changed to MoochSpot (see previous coverage here). That effort was designed to show how third parties could leverage the Facebook API to create new services. It didn't take long for someone to take the bait. Within a few weeks, BillMonk created an interface to Facebook to support their expensing tracking service, now owned by Obopay. Buxfer also supports login via Facebook's username/password (post here), but does not link into the social network as yet.

But Lending Club is the first to leverage the Facebook interface to support actual financial transactions, in this case lending/borrowing. The company is modeled after Prosper. Lending Club timed its launch to coincide with the Facebook developer's meeting and launch of Facebook Platform.

We'll be testing it during the next few days and will report back on whether its a challenge to mainstream lending, or merely blog fodder. Given the rising power of social networks, my guess is the former. 

LendingClub homepage from outside Facebook

LendingClub homepage from inside Facebook