Full details on the referral program can be found at Prosper's Referral Program website. When referring a borrower members receive 0.5% of the loan amount. When referring a Lender members receive $25. The new lender also receives $25 once their first loan is funded.
See our previous coverage of the referral program here.
"Will all of the turmoil in conventional credit markets spur greater interest upstart peer-to-peer lending exchanges? It seems possible, since, in a way, sites like Prosper and Zopa are the antithesis of the highly impersonal, securitized industry that's facing so many problems right now. From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business. Lenders aren't seeing mass defaults, because the standards have been high since the beginning. Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine. Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."
Let's take a closer look at each of his points.
"From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. "
First, what are the peer to peer lending sites we are talking about? Right now there are only two peer to peer lending sites available to lenders or investors in the U.S. - Prosper and Lending Club. The article mentions Zopa but Zopa has yet to launch in the U.S.
I'm not sure of any way that Prosper has emphasized diversification. In fact, Matt wrote an article last month about this - Most Prosper lenders do not diversify their portfolio. Clearly diversification is one of the keys to successful lending but since the minimum amount that can be committed to an individual loan is $50 most lenders never reach an appropriate level of diversification. 70% of lenders on Prosper have less than 20 loans. If one loan defaults they lose 5% or more of their total investment. (Of course, the amount lost is reduced as the loan matures.)
Lending Club, on the other had, has emphasized diversification since their launch three months ago. The minimum loan amount is $25 instead of $50. They have a program called LendingMatch which is supposed to help borrowers diversify based on their risk preferences. If you use LendingMatch you are required to start lending with $500 and pick your level of risk tolerance on a scale of 1 (less risk) to 5 (more risk). As you move to a 5 the average interest rate on your loans move up and the credit grade of your borrowers goes down.
As far as emphasizing direct relationships, Prosper and Lending Club try. Prosper has a group program that is supposed to bring a community feel to lending. Angry lenders on the Prosper forums don't think it's working. Lending Club uses the Facebook platform to build connections between lenders and borrowers. The potential benefit of the connections is greatly mitigated by the desire and requirement for anonymity for lenders and borrowers as I discussed in this article.
"Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business."
Is this true? There are different ways to define brisk business, of course. On the surface, it appears business is booming. Over $84 million has changed hands on Prosper. Prosper just received $20 million in venture capital and Lending Club got $10 million. Lending Club has hit several quick milestones since their launch in May - $100,000 then $250,000 and they are now at $881,600. Loanio and GlobeFunder are preparing to launch this fall. Zopa is expanding to the U.S. However, a look at loan growth on Prosper shows a different story. This graph, from Eric's Credit Community, shows loan growth is slowing. Lending Stats also has a nice graph showing the same trend.
From a peak of over $8.5 million in April, loans on Prosper have dropped month by month. From roughly $8.5 million to 7.5 million to 7 million to 6.5 million with each passing month. This is despite a new aggressive referral program which has created more than 5,000 new borrowers and lenders.
Although the drop started in May, it cannot be explained away by competition from Lending Club since Lending Club is still under $1 million in loans. The trend is most likely due to a realization among lenders on Prosper that high risk loans have a high default rate and are not a wise investment. To be fair, the August numbers may still improve. It's the last day of the month right now and loans can take a week or two from the time they close to the time they actually originate. The trend does show, however, that lending on P2P networks may not be as brisk as news reports indicate.
"Lenders aren't seeing mass defaults, because the standards have been high since the beginning."
Unfortunately, standards haven't been high since the beginning. At one time Prosper allowed people with no credit to borrow. This was a disaster and they stopped that experiment. Default rates for high risk borrowers, as Matt pointed out in his article about risk and diversification, are very high. According to his article, 45% of HR borrowers are late or in default and 28% of E borrowers are late or in default. This translates into a negative expected rate of return for borrowers. Prosper now warns lenders of the risk when lending to HR or E borrowers.
"Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine."
Very true, P2P lending sites are better suited for other needs such as consolidating credit card loans or funding a start-up.
There is, however, potential for peer to peer mortgage lending. Circle Lending is a peer to peer lending site that facilitates mortgage loans among family and friends. The big difference between Circle Lending and other peer to peer lending sites is that it's not a good option for investors, just family and friends who want to help out someone they actually know. There has been some media attention into the possibility for Prosper to facilitate small mortgages - those under $50,000 where other mortgage lenders can't help. In addition, there is a new start-up which we wrote about, Equity sharing - Prosper for real estate, which uses a P2P lending model for mortgages.
"Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."There is a lot of truth in this statement. Lack of available credit will push borrowers to other places such as peer to peer lending sites. However, their luck might not be much better. Due to recent defaults, lenders on Prosper and other sites are getting wiser. Sub prime borrowers are not getting funded at the same rate they were months ago. Lending Club does not permit borrowers with a score below 640 to request a loan. Except for very small loans (under $5,000), sub prime borrowers are already very nearly shut out of the peer to peer lending market. Despite all this, Prosper still makes a lot of sense for many borrowers with good credit who are looking for an unsecured loan.
As for lenders, Prosper does give the ability to diversity to a new asset class. It is different than other investments in significant ways. This could be valuable as lenders try to weather the sub-prime storm. It's unlikely, however, that peer to peer lending sites will fare much better than the sub-prime market at large. Matt, in his article about the effects of a recession on Prosper recommended, "...don't put all of your investment money into any one asset class. You should start with an emergency fund in something like a money market or savings account that can be easily accessed if needed for an emergency. Then any remaining money can be diversified among several different asset classes - stocks, bonds, real estate, foreign markets, and Prosper. The allocation percentages should be based on your risk tolerance and investment timeframe. The longer term (10+ year) money can have a higher percentage in stocks, the mid-term (5-10 year) money can have a higher percentage in Prosper, and the shorter term (<5 year) money should be mostly in cash accounts or bond funds."
Techdirt raises some good points. I think we will see new activity in the peer to peer lending markets in this 'credit market storm' from borrowers and lenders. This activity, however, cannot solve many of the underlying problems that are driving this storm. Borrowers who are going to default with a bank are still going to default on peer to peer sites. Lenders who invest in these borrowers are going to lose money and will tend to favor borrowers with better credit. The same borrowers would be eligible for credit from banks.
The first debt sale was in Dec 2006 with 51 loans sold.
- 27 - 30%: Homeowners with any credit grade
- 15 - 18%: Non-homeowners with a credit grade of D and above
- 3.0 - 3.7%: Non-homeowners with a credit grade of E and HR
- 16 - 19%: Homeowners
- 2.4 - 3.3%: Non-homeowner
Here are the details from this third sale:
- Eligible loans were 122 days past due as of July 26, 2007, provided the loan was not part of any bankruptcy filing
- 309 loans were sold
- Price range: 1.8% - 26% as a percent of principal balance
- AA-A = 23%
- B-D = 13.3%
- E, HR, NC = 8.1%
In the second Loan sale it seems the primary determining factor was homeownership, and some lenders had changed their bidding strategy to factor that in. One lender who goes by the name of PrintAns commented in the Prosper forums, "I hadn't viewed homeownership as good or bad when picking the listings until the last bad loan sale. When they sold bad loans more was given for loans where the borrower was a home owner. I now use home ownership part of my criteria."
In a way it seems unfair for Prosper to be changing the rules of the game, but in reality it is the debt buyers that change their criteria and the amount they are willing to pay for different types of loans based on the changing economic conditions in the marketplace. It probably doesn't help that liquidity for all types of debt purchasing has been drying up throughout the economy.
John Witchel, Prosper's CTO, commented about the debt sale process on his blog several months ago. He specifically mentions two challenges they face in these debt sales. The first is that Prosper is a new and different asset class, and the debt sales are typically geared more toward established asset classes like credit card debt. The second challenge is volume. It takes a certain volume to attract debt buyers, which is the primary reason for the infrequent timing of the debt sales.
"Yes, we all have lofty goals, like helping the infirm, reaching out to shut-ins or starting a catering service. But what we've always wanted to be may seem, to some, a bit less commendable. For instance, I've always wanted to be a loan shark. There's something luridly poetic about outlaw lending: Getting the juice ticking at 30% on some hard-luck mope; making profits off of the backs of the union guy who lost it all at the race track or the stock broker with the expensive drug habit; sending minions like "Bobby Bats" out to do collections. It's like being a banker, only cooler.
Thanks to Prosper.com, my dream has come true, sort of."
So how does he do?
"In the end, I purchased three loans, all of which went to the type of high-risk borrowers that normally resort to getting in hock to degenerates like me. The first was to someone named "Shannon" who said he (or she) was starting a small-town newspaper. The second was to a Yahoo! employee who runs a side business selling refurbished electronics equipment.
The third was to a down-on-her-luck single mom who had no assets and needed cash to get out of credit card debt. She has an ex-husband who did her wrong, and the picture of her 5-year-old son was awfully cute. This cold-blooded loan-sharking racket is harder than it looks. I could imagine myself being tough on the first two borrowers because, deep down, I thought that there was a chance that they could make good. But the single mom seemed hopeless. I gave her the loan anyway. All told, the average interest rate I was getting on the loans was 19.84%. Not usurious, perhaps, but high enough to make me feel pleasantly evil.
...My career as a bad-boy money-lender was deflated even further when I received my first payments, which totaled $4.60 ($4.55, once Prosper took their cut). All three borrowers made their first collection. I didn't even get to have anyone roughed up. Not that I could have afforded it -- even Bobby Bats must make more than $5 an hour."
Oddly, the WSJ article does not have a date but it appears to have been published almost a year ago. Google News shows it was published six hours ago (so maybe it is republished) and it's new to me so I thought I would share it. The author, Jonathan Last, who goes by the username LoanBruce still doesn't have an excuse to rough up any borrowers - his three loans are still current.
What is a loan shark really? According to the very authoritative Wikipedia a loan shark "is a person or body that offers illegal unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. They provide credit to those who are not willing or are unable to obtain it from more respectable sources, usually because interest rates commensurate with the perceived risk are illegal." Well, these loans certainly aren't illegal, so I guess LoanBruce isn't quite a loan shark.
Luckily for LoanBruce, all his high risk loans are still current. I thought it might be fun to take a look at the three loans that are making LoanBruce nearly 20%.
$4,999 at 19.75% for "A Well Respected Publisher"
"My name is Shannon and this is a relist for a personal/working capital loan for my new publishing business. For over 10 years, I've been the creative mind at a newspaper business in Dallas/Ft. Worth, Texas and have now moved on to become a publisher myself. I'll be continuing a very successful classified advertising/newspaper business under a new name which has been respected by the community and is also very charitable to numerous national organizations. I have a great working crew (commissioned), equipment (PCs, phones, Macs, office furniture), and retained many advertising clients who are ready to do business in 2007."
$15,000 at 16.86% to "Consolidate Profitable Business Running on Credit Cards"
"My name is Christopher...I own a small business selling refurbished electronics & cell phones...We have recently experienced an enormous growth spurt in quarter over quarter sales and expect the trend to continue in 2007."
"You can see more about this business by visiting www.auctioncleveland.com. If you research my sales for December 2006 we had over $60k in eBay sales and $10k in outside eBay sales. We expect January to be approximately $85-$90k gross revenue @ 35% margin. I carry a 100% feedback rating on eBay which should help show I am a serious and trust worthy business. Show me ANY other company that can transact over 5000 transactions and receive NO negative responses to their service and I will show you an AA credit rating. I turn over inventory very quick and need keep larger inventories. We have the infrastructure to scale but not enough cash to float the inventory costs. I currently have $40k in cash and would like to borrow another $15k to expand inventory for three to six months."
$1,500 at 26% for "A New Year"
"I am a 45 year old single mother with a 5 year old son. I have worked in administrative services for the last ten years at the same company."
"I got married in 2001. My husband had terrible credit history, so when he wanted to start his own limo business, we put the loan for his Cadillac under my name. I got pregnant; we moved to a new apartment with more space. I foolishly picked a place that was way out of our price range. My husband's limo business was doing well, so although things were tight, we were still managing to stay on top. After 9/11, the travel business came to a halt and we started falling behind on car payments. My son was born in September, and when I had to go back to work, we had to put my son in daycare ($1000+ a month). In 2003, I filed for bankruptcy. I still had the Cadillac loan in my name, I had tried to consolidate my credit card bills, which was a huge mistake, and my ex wasn't paying child support...I am still having a hard time paying my bills...The reason I am looking for this loan is because I want to try to get ahead a bit, or at least break-even."
"Did you know that the average loan on Prosper is outperforming the 2-year return on the S&P 500? Smart lenders like you have already discovered that lending on Prosper is a great way to earn a market-beating return!"
Some people on the Prosper forums claim the ad is misleading. You have to read the fine print of the email to realize that what Prosper is calling average performance is computed using just the performance of AA loans with no delinquencies which is a very small part of the overall marketplace. They also selectively picked date ranges that ensured the best performance relative to the S&P 500.
Here is what their fine print says:
 Rate of return shown is the average net annual return on Prosper loans originated between 7/22/06 and 7/22/07 to borrowers with AA credit grades who have 0 delinquencies and 0 to 2 credit inquiries on the their credit record, as of 8/23/07. For more information, go to http://www.prosper.com/lend/performance.aspx.
 Avg. annual return of the Standard & Poors 500 Stock Index from 8/16/05 to 8/16/07.
 APY on FDIC-insured Citibank, N.A. 1-year Certificates of Deposit as of 7/23/07.
 Annual Percentage Yield (APY) on FDIC-insured E*TRADE Money Market accounts as of 7/23/07.
Overall, I think it is encouraging to see that sector of Prosper doing so well. In our posts on this blog we have tried to steer lenders toward A and AA loans to earn the best performance. However, Prosper does need to get better about creating straightforward marketing. Earlier marketing campaigns claimed that you could make up to 29% returns on Prosper which was also misleading since no one is earning those kinds of returns after fees and defaults.
One application Business Week looks at is HedgeStop.com. "The application has yet to offer features unique to Facebook. There seems to be no reason users shouldn't simply go right to HedgeStop.com." I made a very similar point in my Lending Club/Facebook analysis. Facebook adds very little added value to Lending Club outside viral marketing potential. Most of the Lending Club activity takes place outside of Facebook; it's simply required to verify login credentials and does offer some potential group associations.
Facebook Senior Platform Manager Dave Morin would disagree with me and thinks applications like Lending Club should focus solely on the Facebook application. From the Business Week article:
It's a common mistake, says Facebook Senior Platform Manager Dave Morin. According to him, too many companies still see applications as marketing rather than as new business. They bring users to an application either to advertise to them or to build a connection they hope will subsequently send users off Facebook and to their main business—a company Web site, say, or its online store. Instead, companies should be trying to make the application into a self-sustaining business that generates revenue through the service it provides on Facebook. "The applications that are the most successful are the ones that integrate seamlessly into Facebook," Morin says, a model that conveniently supports Facebook's own business ambitions.
Business week considers Lending Club "the closest to developing the most appropriate business model." Here is a portion of the article which discusses Lending Club:
Says Lending Club CEO Renaud Laplanche, "Person-to-person lending works best in an a environment where people feel connected to one another, lending to friends and friends of friends." He also claims that peers trust peers to give better rates than a bank. So far, the site has attracted 13,163 users. With its 3% transaction fees, Laplanche estimates that by the end of August, the company will have moved $1 million since its June launch. But the revenue for the company in the same three-month interval is only $30,000. Given the minimal costs of maintaining the Web site and its relatively small staff of 21 people, this may be enough for now, but as the application grows, its infrastructure costs will expand. Raising the company's commission, however, would quickly jeopardize its value proposition to users.
Facebook, where users expect applications to augment their social experience with little effort and at no cost, may be a tough environment for companies whose ultimate goal is making a buck, especially since so many companies are still trying to work with traditional ad models. Ultimately, the most successful applications are those whose business model, brand identity, and natural users match the culture and demographic on the network. As such, the top applications may not provide plug-and-play solutions for every brand hoping to enter Facebook. But the lessons they teach about the need for authenticity and relevancy are universal tenets for marketers in the Web 2.0 age.
The figures are interesting and help explain the need for venture capital. It's hard to cover salaries with only about $10,000 in revenue per month. At least $8,000 has gone to the video contest. Of course, Lending Club is very young and they are growing rapidly. Revenue will grow too.
The peer to peer lending market is hot right now. In June Prosper secured an additional $20 million in venture captial (for a total of $40 million) and will expand to Japan. Globefunder has raised 1.5 million in seed capital and Loanio is expected to launch this fall.
Update: Lending Club has now announced the VC on their blog. According to their CEO, Renaud Laplanche, "Facebook now has over 6 million active user groups which are prime targets for financial services. However, Facebook users are younger than the average online population, and our strict screening criteria (640 minimum credit score, less than 20% DTI) led us to decline about 75% of all applications, as younger borrowers tend to have a lower FICO score. We are coming up with new tools to help the “declined” borrowers understand the importance of good credit and take specific actions to improve their credit score. We will be using the funds to expand beyond our current Facebook application."
Peer to peer financial marketplaces provide a platform for individual lenders and borrowers to interact and transact. These marketplaces disintermediate the traditional financial services business models. In this exploratory paper we study the operation and effectiveness of one such marketplace: Prosper.com. We analyze six months of lender, borrower and loan repayment data to answer preliminary research questions about lender behavior, market effectiveness and antecedents of loan default. We show that lenders mostly behave rationally and charge appropriate risk premiums for antecedents of loan default. We also show that there are mismatches between risk premiums charged and relative importance of factors that drive loan default. We then explore the dynamic process of lenders adjusting their lending strategies to reduce these mismatches. We analyze the effectiveness of the group reputation used in the marketplace and show that it is not effective in promoting good borrower behavior. Our analysis provides a base for future research in this exciting and evolving context. Our results provide directions for practice applications as well as future research in design of financial marketplaces, investing and risk mitigation strategies and improving the effectiveness of peer-to-peer financial marketplaces.
Kumar attempts to answer the following research questions:
- Do lenders follow rational lending practices while lending on the marketplace? That is, what factors affect their lending strategy and whether they are in line with rational expectations?
- Do lenders follow efficient lending practices while lending on the marketplace? That is, what are the antecedents of loan default and whether lenders charge appropriate risk premiums for factors that drive loan defaults?
- What is the impact of group reputation systems on borrower and lender behavior?
- Is the marketplace evolving to achieve higher lending efficiency? That is, are lenders adjusting their lending strategies and charging appropriate risk premiums as more information becomes available on antecedents of loan defaults and the relative importance of these factors that drive loan defaults?
The results are certainly interesting. One thing that catches my eye is the homeowner determination. Based on Matt's analysis, homeowners are actually a greater risk of default than non-homeowners. Yet, according to the dataset Kumar used, being a homeowner is not a significant variable but Prosper lenders bid down homeowner loans. A careful look at Kumar's dataset could help increase returns for lenders.
Later this week I intend to provide a deeper look at Kumar's paper but for now check out his PowerPoint.
Here's an excerpt from the announcement:
Listings now include borrower's past Prosper activity
Borrowers taking a second (or third or fourth?) Prosper loan will now have their Prosper payment activity recorded on the listing page and on their member page. This includes total loans, principal borrowed, on time payments, total number of loan payments which brought a loan current which were made at less than and more than one month past the due date, total payments billed, credit grade history with dates, and credit grade change.
Advanced search and standing orders have also been updated to allow lenders to search and bid on loans that meet certain criteria in these departments.
Borrowers can make payments with Prosper account
Borrowers can now make payments on their Prosper loans using funds from their Prosper cash balance, if they have at least $25 available.
Borrower activity reported to TransUnion
Borrower payment activity is now reported to TransUnion, one of three major U.S. credit reporting agencies. Payment activity is already reported to Experian. We hope to start reporting to Equifax, the third major credit reporting agency, shortly.
All historical Prosper loan activity to date, including payments, delinquencies, and defaults on active and ended loans will also be reported to TransUnion.
Improved messaging on listings cancelled during review
One big point of frustration for borrowers whose listings are cancelled during review is that they don't receive a specific reason for why their listing was cancelled. This can range from the serious (name on bank account doesn't match borrower's) to the benign (hasn't yet verified bank account ownership).
From now on, when a borrower's listing is cancelled during review, the borrower will receive a message with a specific reason (or reasons) why their listing was cancelled, whether they may re-list or not, and possibly a note from customer support about what they should do before their next listing to ensure that the listnig will not be cancelled. Lenders will also receive a message with a specific reason.
Loan numbers tied to listing numbers
Borrower loans are now tied to their listings, both on the borrower's member page and in the API. On the borrower's member page, you can see each loan's balance and payment performance in a simple table.
Invite friends from Outlook, Gmail, Hotmail, AOL, Yahoo mail, etc...
When you invite your friends to Prosper (and earn referral awards), no more need to copy and paste their email addresses into the "Email address" field. Just click the "Add from my address book" button, and go to town.
Search help pages
Now you can search the Prosper help pages using keywords.
Referral program extended to Dec 31, 2007
The referral program has been extended until Dec 31, 2007. Invite a new borrower and earn 0.5% of his or her loan value when their loan gets funded, or invite a new lender and you both get $25 when your friend funds his or her first loan.
Over 5,000 members have successfully referred a friend since the program started in June. Everyone who refers a friend by August 31 will receive a stylish black Prosper T-shirt, and also be entered in our "Prosper in Las Vegas" sweepstakes.
The four contestants that won prize money from Lending Club are:
- $3,000 for Best Video - Chris Barrett
- $3,000 for Most YouTube views - Steve Dinelli
- $1,500 for Best Storyboard - Jonathan Reed
- $500 for Jury Prize - Share Ross
Three of the four winners were featured in our video contest review one week before the end of the contest. Jonathan Reed was a late entrant and uploaded his video with just a week to go.Best Video - Chris Barrett
Chris makes movies professionally and founded Powerhouse Pictures Entertainment with Efren Ramirez, who is most well known as Pedro in Napoleon Dynamite. The company's first project is a documentary on the teacher student sex scandals called "After School". Read our complete interview of Chris here.
Chris Barrett's video for the Lending Club contest shows a girl who is getting her Paris Hilton news through magazines instead of the internet since her laptop broke. "I can't believe their putting Paris Hilton in jail," she exclaims to her friend who can't believe she's so behind the news. The friend suggests Lending Club to borrow the money and replace her computer.
Most YouTube Viewers - Steve Dinelli
Steve's 49 second video was made with 1,500 still photographs using a stop motion technique. Despite the complexity of the video, Steve has perfected the technique and made the video in only two hours. It was the most viewed with 19,011 views on YouTube.
Steve just graduated high school and will start college at Robert Morris in Chicago this fall. He enters every video contest he can find and is currently featured as a finalist in Girl Talk's Think Twice Before You Drink contest (5th video in the row on the top). You can read our complete interview of Steve here.
Storyboard Award - Jonathan Reed
Jonathan Reed was a late entrant and uploaded his video with just a week to go. His video was instantly popular and collected over 6,000 views in that short period of time. If uploaded earlier it would have been a strong contender for most views. The video is an entertaining look at a few Facebook characters who help each other out with a loan through Lending Club.
Jury Prize - Share Ross
Share Ross was the former bassist for the platinum-selling EMI recording artists Vixen and is currently the guitarist and singer for Bubble. She is a big fan of peer to peer lending and in our interview called it "anarchy in its finest form."
She was surprised when Lending Club contacted her and offered her a prize even though she was a long way from the winners as far as total views go. She said, "I'm honored and quite surprised about the Jury Prize. I certainly wasn't expecting anything like this and I think in some way, it reflects the company's product... people helping people. This shows that the head of Lending Club is 'hands on' and I am looking forward to seeing how they grow as a company!"
Share is going to use a portion of her prize money to reinvest in Lending Club. She told us, "You'll be seeing me on Lending Club as a lender sometime in September or October."
Lending Club considers the contest a huge success and they plan to make it an annual event. CEO Renaud Laplanche shared a few parting thoughts with us about the contest:
Will you hold other video contests in the future?
Absolutely. At the very least, we will make this an annual event over the summer.
What was your favorite video?
I really liked the 4 winners. I also liked Sean’s skateboard crash video and the remake of Battle at Krugger. Racoon in Da Club was funny; the “magic of lending club” wasn’t bad either. There was also this video made by a couple who actually borrowed on Lending Club and took a trip to Europe.
There were some concerns about falsely inflated view counts. What did you do to ensure this was a fair contest?
We’ve monitored view counts and inbound links to videos pretty closely and issued warnings to contestants whose counts were “suspicious”. We’ve also looked at the number of videos watched by contestants and the correlations between the number of videos watched and their own video counts. None of these methods is bullet proof though, which is why we decided, in agreement with all the main participants, to take into account YouTube views in our rankings, but also incorporate more subjective criteria like the quality of the content and clarity of the message.
The Battle of Kruger video was in first place when it was pulled by YouTube for copyright violations. Other videos have also been accused of using music or video that they did not own the rights to. How do you feel about that?
We take copyright enforcement very seriously. All 4 winners have produced original content specifically for the Lending Club Video Contest. Too bad I really liked the bufffaloes in Battle at Kruger!
In the peer to peer industry Lending Club appears to be a leader in marketing with Facebook, YouTube, Lookery and other initiatives. What other creative marketing ideas can we expect from Lending Club in the future?
I think you can expect us to become better at these things, as we learn more about social networks, YouTube, and the way to leverage connections among people. Lookery is a fantastic tool in that respect. You will also start seeing some tie-in between social networks and some more traditional ways of exposing connections among people.
As reported by WiseClerk and Rateladder, there has been an uprising in the official Prosper forums over the last couple of days over this issue. Lenders have asked repeatedly for Prosper to force these blenders to repay their own loans with the payments they receive from their borrowers. The issue became heated in the forums over the last two weeks as one of Prosper's top lenders, who goes by the screen name leporello, called Prosper's move "financially idiotic" and started a near riot in the forums. He was eventually banned from the forums but his auto signature reads, "After $100K, I have stopped lending. Why? Prosper doesn't care about lenders."
Yesterday, Prosper responded to the issue by putting the accounts of late blenders on hold. This means they cannot place new bids and must contact Prosper before withdrawing funds. Here's the official announcement:
"Thank you for raising the issue of late Lender-Borrowers to us.
As of today, all accounts of Lender-Borrowers who are 30+ days past due have been put on hold. This means these Lender-Borrowers won’t be able to place bids or send out group invitations on Prosper until their loans are brought current.
By the end of this year, we expect to have this process automated, but until then we will manually put 30+ days past due delinquent Lender-Borrower accounts on hold.
We are exploring whether and under what conditions state law will allow us to automatically apply lender funds if the lender is a delinquent borrower. We also expect to have an answer to that question by the end of the year.
Beginning with our next site update, borrowers who are also Prosper lenders will be able to apply their Prosper balances to their existing loans themselves, rather than have to move the money to their bank account first."
A later clarification added this:
"At the present time, we feel we cannot keep a person from their money. However, all transfers on held accounts must be initiated by Prosper. It’s the same issue as the state law conditions: we are exploring whether state law allows us to truly hold funds or apply them to delinquent loans. I’m sorry if this is an unsatisfying answer. As I said above, we expect to have an answer to this issue by the end of the year. As for group leaders who are also delinquent on their loans, they will also be addressed in the automated solution we are working on for year-end."
The reaction to this announcement was mixed. Ran-ran called it, "This is the best news I have heard in a long time." Another lender, Ira01, was disappointed on how long it would take, "Being a lawyer, I certainly understand Prosper's need to research the legalities involved...however, this should NOT take another 4.5 months."
This is not the first time top lenders have been dissatisfied with Prosper. Fred93 is a top lender with over $700,000 invested. He has soured on Prosper and has published a couple open letters to Prosper (1, 2). Months ago he wrote, "Sadly, I have to report that my disappointment with Prosper’s management has continued to increase month after month, and my enthusiasm has continued to decline. I’m pretty sure that the majority of things that are wrong can be fixed. However my confidence that Prosper’s management will fix them has simply declined with time as I’ve witnessed their response."
Others think the controversy was unwarranted and remain optimistic about the potential returns on Prosper. Rgf said, "The only reason I'm pro-Prosper, is the hope that it is possible to achieve stable 10% returns over time. This is an amazingly tantalizing prospect. There is no other investment opportunity out there that gives a stable 10%. The stock market gives 10% long term, but with gut-wrenching volatility...In general, I've become tired and perhaps somewhat defensive of these forums becoming a litany of complaints against Prosper. I sometimes think people are not realizing the diversification potential at stake here. I really think this is an amazing opportunity, a totally new asset class."
Lending Club, the only active competitor to Prosper in the U.S., does not allow users to borrow and lend at the same time.
Free Credit Report. In 2003 congress passed an amendment to the Fair Credit Reporting Act (FCRA) requiring each of the consumer reporting companies (Equifax, Experian, and TransUnion) to provide you with a free copy of your credit report at your request every 12 months. You can request this report by phone, by mail or on the web at AnnualCreditReport.com. The Federal Trade Commission has created a website to inform consumers of their options, as well as to warn consumers about impostor websites and services.
At AnnualCreditReport.com you have to fill in a form, provide them with your social security number, and answer some questions to prove your identity. After that they walk you through obtaining one credit report at a time from each of the three agencies. Each time you switch to a new agency you have to prove your identity again by answering questions based on information they have on file. Once you have completed the process you will have a report from each agency that shows your credit accounts and several years worth of payment history. What they don't provide you with is your actual credit score number. You have to pay if you want to see that. [Edit from Tom: See note at bottom on how to get Experian credit score for free as well.]
After looking through the data, it is possible that you will find an inaccuracy in your report. You will want to check all three reports because they will all be different. If you do find a mistake, don't fall for advertisements from companies that claim they can help you clean up your credit, quickly improve your credit score, or remove negative information such as late payments or bankruptcies from your credit record. Companies that advertise these services are usually fraudulent or are charging you fees (sometimes very expensive fees) for something that you can easily do yourself for free.
Disputing a claim. The websites for each of the consumer credit companies offer instructions for disputing a claim. They can be found at:
If you dispute an item on your credit report the credit agencies are required to contact the lender and verify the disputed information. They are then required to let you know whether they were able to verify the information and who they talked with at the lending institution. If they cannot verify the information they are required to remove it from the report. My advice is to actively dispute any items that you know are incorrect. However, if you have legitimate negative information on there then don't bother to dispute it. The credit agencies do make mistakes, but they are also pretty good at verifying the original information, so if the negative information is correct than just work on improving for the future. As the negative information gets older your credit score will improve.
Identity theft. If in this process you discover you have been the victim of identity theft you can find information on recovering from identity theft at the Federal Trade Commission's website.
Free credit check from Prosper. Okay, so now you have your free credit reports and it will be a year before you can pull another official free credit report. What can you do in the meantime to keep an eye on your credit? Well, you can continue to get monthly reports at a cost of $9.95 per report or sign up with third party monitoring services for a similar fee. But, what if you want to do it for free? One lender on Prosper hopes to do just that. His plan is to routinely go part way through the process of creating a listing on Prosper as a borrower, until he gets to the point where it shows his Experian credit grade, and then cancel the loan process. This only works with Experian, but he hopes that by doing a similar process at other peer to peer lending sites he can check with other agencies. He figures that "it is a free and easy way to make sure my identity hasn't been stolen (at least by someone who applied for an account that checked Experian). I will probably sign up at Lending Club as well to monitor my Transunion report. If Zopa ever launches and uses Equifax I will be all set." This may work to some extent but it will not actually provide you your credit score (just Prosper's credit grade) or the detailed information that comes with a normal credit report.
Cost of poor credit. So, why all of the worry about checking and monitoring your credit? If you have got this far in the article, you probably understand the importance of having good credit. Having poor credit increases the amount that you have to pay for home and car loans. But what makes it even worse is that it can ruin marriages, contribute to poor health, and can even affect what job opportunities are available to you. One analyst at TheStreet.com suggested that having a poor credit score could cost you over $1 million dollars.
If you do monitor your credit, you should be aware that you may experience a significant change in your score this fall. Don't panic right away, it could just be due to FICOs change in their scoring algorithm. FICO is adding two additional categories on the low end of the scale, and eliminating the benefits of being an authorized user on a credit card with someone that has good credit. This has the potential to negatively affect tens of millions of scores, so be on the lookout for that change.
Update from Tom: Experian runs freecreditreport.com which provides users with a free credit report and credit score. This is seperate from AnnualCreditReport.com which provides you with one free credit report per year (without score). To get your free detailed credit report on Experian's freecreditreport.com you actually sign up for the Triple Advantage Credit Monitoring program which costs $12.95/month but if you cancel within the first 30 days it is free.
Michael Solomon, a New York lawyer, is the CEO and founder of Loanio and has agreed to share some information about Loanio with our readers. Solomon currently runs a fiancée visa attorney and marriage visa practice in New York City. In addition, he is the part owner and founder of Omnilaw Legal Plans, Inc. which celebrates its 10th anniversary this month. He has a Law Degree from Brooklyn Law School and a Bachelor of Arts Degree from Washington University in St. Louis. He is a member in good standing with the American Immigration Lawyers Association and The New York State Bar.
Loanio will launch this fall and be focused on the United States. In addition, Loanio is working with some overseas partners and is expected to expand internationally in late 2008. Michael Solomon shared the following information about Loanio:
What inspired you to create Loanio?
"For the last 10 years, I have been running a company that provides over 4 million employees and families with legal and financial assistance. I have seen my share of ugly, unfair and/or lack of credit issuance and the inherent debt problems often associated with it. The idea of "leveling the playing field" by leveraging the internet is a powerful and socially conscious one that appeals to me. I have done lots of traveling in South America and for about 4 years I have been following the great things that have been happening with advances in the world's microfinance markets. In many other third world countries, great things are also being accomplished. A few years ago when peer lending started to show up on the internet, it got me thinking and wondering about other possibilities. It seemed only natural that the now emerging market of peer lending would evolve to where it is and where it is going now is something very exciting and some place I want to be."
When do you expect to launch?
"Fall 2007. While I prefer to leave the particulars out right now, I will say that we are building a platform that we believe will foster more loan originations (than other current platforms) with the possibility of greater security and probably make more "lenders and borrowers" very happy."
If you are interested, you can sign up on Loanio to receive an email when they are ready to launch.
Update (9/10/2008): Loanio screenshots
"We’re back after a longer than expected hiatus. We apologize for the delay between updates. There’s a saying that things happen in threes, well, in a perfect storm of sorts, our web programmer needed to take a leave of absence last month. Between that, the Prosper data changes, and our backend changes/server migration, we’ve been trying to pick up the slack."
Reporting to the Controller, this position will be responsible for assisting with the month-end close, including journal entries, account reconciliations and variance analysis within the corporation. In addition, position will work closely with department heads to provide financial information as needed. Special projects will be assigned as identified.
I'm glad to see Prosper grow. What surprises me is the odd places that I find company announcements and news. Prosper does not have a blog. Instead they rely on an official company forum for announcements. I very rarely find announcements there. Instead I find them at Rateladder or TechCrunch. I'd nominate Rateladder to be Prosper's official company blog but I've seen Loanio ads up lately. That might not go over too well.
As it is, I count on Rateladder and deep web searches to keep me up to date with Prosper news.
Chris has formed a production company called Powerhouse Pictures Entertainment with Efren Ramirez, who is most well known for his portrayal of Pedro in Napoleon Dynamite. The company's first project is a documentary on the teacher student sex scandals called "After School". Chris was also featured as one of People Magazine's 25 Most Intriguing People of 2001 and holds a patent for the invention "My Little Footsteps" which shows children which shoe goes on which foot by using a sticker that goes inside the sole of their shoes.
Chris found out about the contest after it had already been live for nearly two weeks by another competitor, the one who made Raccoon in Da Club. Chris quickly made up for the late start. As an established video producer, the Lending Club commercial that Chris produced received immediate attention. It was featured on Elites TV and in front of the 2,200 subscribers he already has on his YouTube channel.
Chris Barrett's video, complete with an actual script and actors, shows a girl who is getting her Paris Hilton news through magazines instead of the internet since her laptop broke. "I can't believe their putting Paris Hilton in jail," she exclaims to her friend who can't believe she's so behind the news. The friend suggests Lending Club to borrow the money and replace her computer.
The competition is hot with less than 24 hours to go in the contest. One of the top three videos has been pulled from YouTube for copyright violations and the other two have been collecting views at dizzying rates. Chris Barrett's video is one of the two leaders and has rocketed to its position after a very late entry into the contest. Chris Barrett shared his thoughts about the contest and his video with us.
How did you hear about the Lending Club video contest?
I found out about the contest through one of the other contestants. I currently have a video featured on the front page of YouTube and they sent me an email and said I should enter the contest and to check out their video... so I got my team together and we shot and edited the video in the afternoon on Friday. Had it live online and boom...it began getting hits right away. I have over 2200 subscribes on YouTube who are always waiting to see my newest videos.
Tell us about how you made the video.
We shot the video in HD, and edited it in Final Cut Pro. We have never used Lending Club but we signed up on Thursday and checked out the site and it looks like a great company that could be successful if the borrowers are borrowing for the right reasons. Like with any loan or credit card you have to make sure you are able to repay what you take out.
What do you plan to do with the $5,000 if you win?
If we win the contest we will put it towards our future endeavors including a mini vacation.
Tell us about yourself.
I was the first corporate sponsored college student in America. We were sponsored by First USA (the former credit card company) and they paid for our college tuition in return we were spokesguys for the company and went on TV speaking about financial responsibility. I ended up in the documentaries The Corporation and Maxed Out which both won awards at film festivals around the world including Sundance. I realized I wanted to make films as a career and formed a production company 'Powerhouse Pictures Entertainment' with Efren Ramirez who starred in Napoleon Dynamite as Pedro as well starring in Crank, Employee of the Month and the upcoming films Ratko and American Summer. I am currently directing a documentary on the teacher student sex scandals happening in American schools.
The Battle of Kruger video was just pulled for copyright violations. Also, the 14-second stakeboard video has also been accused of using music that is not theirs. How do you feel about that?
I believe it goes without question that all of the contestants in the Lending Club contest should adhere to the official contest rules as well as YouTube’s copyright policies. The winning contestant must submit the rights of their material to Lending Club to use as it sees fit. It is impossible to license material that isn’t yours and it is unethical to try. I think the essential issue to consider here is the mission of Lending Club to be an honest, creative, and effective system. I hope that the winner of the Lending Club video contest is the person with the video that will best advertise the company: a video that was created honestly, creatively, and is able to spread the concept of peer to peer lending effectively.
By this time tomorrow we should be able to see which video has the most views. However, the contest will not be over until Lending Club announces the winners "on or about" August 11th. Lending Club CEO has reminded contestants, "that before awarding the winning prize, we will be ensuring that the winner has fully complied with the contest’s rules posted above." He has also said Lending Club is "getting YouTube's cooperation to make sure that no one tampers with the view counts." As I mentioned in my original article announcing the contest, gaming the view counts would be my biggest worry with the contest.
LendingMatch™ and borrowing minimums are now $500
You can now use LendingMatch™ to generate portfolio recommendations with as little as $500. It is necessary to lend at least $500 to use LendingMatch™ because the algorithm tries to allocate your investment into at least 20 fractions of loans, for diversification purposes. Since the minimum investment in each loan is $25, you need at least $500 in total. The minimum amount you can lend without using LendingMatch™ remains unchanged at $25. You will also see smaller loans on the site, as we have reduced the minimum loan amount to $500.
Invite your Facebook friends and earn referral bonuses
LendingMatch is Lending Club's answer to the diversification problem. As Matt mentioned in a previous article, most Prosper lenders do not diversify. Mostly, this is because they do not have enough invested. If you are invested in one loan and it defaults you lose all your money. Diversification is very important.
As I mentioned back in July, Lending Club "quietly launched a referral program." Now they are making it more public via email to lenders and a blog post.
The other four new features mentioned on their blog post are:
- Minimum loan request for borrowers is now $500 instead of $1,000.
- The my account area now contains detailed portfolio analysis and individual loan information.
- Adjustments to the expected monthly payment amount to deal with rounding issues.
- Borrowers from Arizona can now request loans.
In 2004 videographer David Budzinski and photographer Jason Schlosberg were sitting on the opposite side of a watering hole in the African savannah filming a herd of buffalo. As seen in the video, the buffalo approach the water unaware of the lions resting nearby. The lions charge and disperse the herd, picking off a young buffalo and knocking it into the water. While trying to drag the buffalo out of the water, it is grabbed by a pair of crocodiles, who fight strenuously for it before giving up and leaving it to the lions. The lions sit down and prepare to eat, but are quickly surrounded by the reorganized buffalo, who move in and start kicking at the lions. After a battle, which includes one lion being tossed through the air, the baby buffalo (who is miraculously still alive) escapes into the herd. The emboldened buffalo chase the remainder of the lions away.
David, in his re-make for the Lending Club video contest, compares the wild animals to banks and credit cards who are preparing to devour a lender. The lender is rescued from certain financial death by a pack of brave Lending Club lenders. It's a very creative and entertaining video. In fact, it's hard to watch just once. This works to David's advantage since the contest winner is the one with the most YouTube views by Friday. David shared a few thoughts with us on how he came up with the idea and created the video.
How did you hear about the Lending Club video contest?
A client in the credit union space forwarded an email newsletter to me in which the contest was mentioned.
Where did you get the idea to create this video?
Simply put, the idea behind my video was an epiphany. I learned about the contest at about 10:00 AM and pondered through the rest of the day whether or not I wanted to enter. The idea to utilize the popular YouTube video “Battle at Kruger” (an amateur shot of some truly amazing animal behavior on the African plain) came to me and by 4:45 PM that afternoon I had made the decision to throw my hat into the ring and was hard at work.
Tell us about how you made the video.
From a technical perspective I used Camtasia to capture the footage of “Battle at Kruger”, Goldwave, a laptop, and a Radio Shack microphone to record the audio, Premiere to edit the footage, and After Effects to export. From a creative perspective the work was mostly in the scripting. I wrote the initial script in my head and put it down on paper. After one revision I was ready to record. If I had to do it over again I'd make a few minor changes. Total work time was 6 to 7 hours.
Have you used Lending Club or heard about it before this contest?
Though I’ve not heard of Lending Club before, I am familiar with peer-to-peer lending.
What do you plan to do with the $5,000 if you win?
Baby needs a new pair of shoes!
Tell us about yourself.
For my day job I work in multimedia productions. You can see some of my handy work at the below links. I also do some acting which is featured below as well.
Animation - The purpose of this animation prototype for pilot training was to replace more expensive and difficult to maintain video training.
Comedy - These videos were made in conjunction with Doublesharpe Productions to market comedian Tim Hawkins.
Drama - Demo video to market David Baldwin's dramatic presentation of Scripture. Dramatic videos of David Baldwin including renditions of Patrick Henry’s “Give me Liberty or Give me Death” speech and Jesus’ Sermon on the Mount.
‘No shoot’ Video - This marketing video was created without an actual video shoot. By using jumpbacks (video background), animation, screen capture video, voiceover, and images, the client avoided the disruption of a video shoot and got a product with which they are satisfied.
‘Screen Capture’ Video - A training or marketing video of a software product requires crisp, clear screen capture footage. This video for ChurchMetrix provided a useful sales tool to give perspective customers a quick overview of the software’s functionality.
Update (Aug 9): The video has been removed from YouTube. The page now reads, "This video is no longer available due to a copyright claim by Negative Space Buzz." This version of the Battle of Kruger, posted in May by Negative Space Buzz, has over 9 million views and is over 8 minutes long. David was caught off guard by the copyright, "Oh, that was painful! I had no idea about the copyright! Nor did I have any advanced warning. I checked the stats first thing this morning and noticed I was in first place and then...the hammer. I managed to track down the guy who holds the copyright and I spoke with him over the phone but, alas, he was not open to the idea of me using his video for the contest. I wish all the best to the eventual winner of the contest and to Lending Club. Soli Deo Gloria."
"You can't erase the past. But with Lending Club, you can refinance old debt.
To buy a new stakeboard...or pay off medical bills."
Sean has opened up a narrow lead in the Lending Club video contest which ends Friday. The winner, as measured by the video with the most views on YouTube, will receive $5,000. Right now Sean has 13,475 views while movie director Chris Barrett has 13,327 views and Steve Dinelli, who we featured yesterday, has 12,649 views. Thousands of viewers have found Sean's video embedded on MySpace and social broadcasting site NowLive.
Although his video has been widely popular, it has also drawn some criticism. An anonymous reader left a comment on this post accused Sean of copyright violations, "[The video] uses copyrighted music from Pink Floyd, and someone else's video, i've seen it on online before many times." Sean responds, "people have to understand that viral videos and guerrilla marketing is the present. Remixing old and new themes is what keeps things fresh." Sean shared those thoughts and others as he told us about his video.
How did you hear about the Lending Club video contest?
I heard about the Lending Club contest because I participated in another contest to get the most people to join a Facebook group (I placed 7th).
Where did you get the idea to create this video?
I wanted to create a truly viral video. One that people would want to send each other because of its content. I have ADD at times, so it's nice to be able to create a video which is short, to the point, and entertaining.
Tell us about how you made the video.
I made the video using Adobe Premiere, taking the intro from Pink Floyd's "Money" and a skateboard crash.
Have you used Lending Club or heard about it before this contest?
I have not used Lending Club, but I plan to when I have enough disposable income to invest.
What do you plan to do with the $5,000 if you win?
I plan to use the money to put a down payment on my first car. I've been working all summer, so it would be nice to have some income to supplement.
Tell us about yourself (work/school).
I'm a third year at USC entering my first semester of film school. I also do stand-up comedy part-time and am looking to make a career out of it.
Anything else you would like to add?
I know there has been some concern about copyright issues as well as marketing tactics, but people have to understand that viral videos and guerrilla marketing is the present. Remixing old and new themes is what keeps things fresh.
About the video on Myspace: Often times we watch sporting events, television, movies, etc. and view ads, either through product placement or sponsorship (i.e. Nascar). Myspace and Facebook embed ads for viewers to see. The next logical step is for the users themselves to place ads on their own pages to generate revenue.
Good luck Sean and thanks for sharing your video with us!
Be sure to come back as we feature one of the top Lending Club videos each day this week. Vote for your favorite video here.
BankServ powers innovative Lending Club person-to-person lending and borrowing platform
SAN FRANCISCO, 7 August, 2007 — BankServ, worldwide experts in electronic payments, today announced its part in the successful launch of Lending Club's collaborative person-to-person (P2P) lending platform. Lending Club has implemented BankServ's Magex Payment Platform, ACH reporting and cash management solutions.
P2P banking and payments is set to be a major growth industry. The BankServ solutions have been deployed to support Lending Club's innovative, online facility that brings a new financial service to various online communities (including university alumni groups, social networks, and professional organizations). The Lending Club solution offers users the ability to get a loan, fully online, at a lower rate than from traditional sources. Lending Club manages user authentication, credit checks and loan processing, and, through its LendingMatch™ technology, matches up groups of compatible lenders and borrowers.
"We set out to find a company that could support our P2P service and provide us with ACH reporting and cash management facilities that would seamlessly integrate with the other components of Lending Club's technology, namely credit analytics, portfolio recommendation, profile matching, authentication and collections. We recognized that BankServ's Magex Payment Platform has become the standard for any company that is serious about launching a P2P financial service," comments John Donovan, COO, Lending Club.
"Many payment industry experts are convinced that P2P lending will define a new era in electronic payments. There is a clear need for new solutions that improve service and convenience to consumers, and Lending Club has achieved this with its innovative LendingMatch™ technology," said Mary Ellen Putnam, Vice President of International Business, BankServ. "We are pleased that the BankServ technology offerings have been selected by Lending Club and look forward to working with this impressive team as they build on their success."
"We were looking for a partner that brings experience in P2P, the payments industry, and that also understands the need for speed and efficiency. BankServ has proven technology and services that made them an obvious choice for Lending Club," concludes Donovan.