Lending Club, one of the major sites operating in the peer-to-peer lending market, is back in business and accepting new lenders. This marks the end of a six month “quite period” during which the company applied for registration with the Securities and Exchange Commission (SEC). The changes made as a result of the registration will help the company avoid legal problems in the future and may make the peer-to-peer lending process more user-friendly.
The primary reason behind the temporary hiatus was to bring the company into compliance with securities laws. Since “lenders” on peer-to-peer sites are not actually lending money directly to borrowers, but rather purchasing promissory notes for loans made by the social lending company, technically peer-to-peer loans are securities. Because peer-to-peer sites manage the buying and selling of these notes, technically they are dealing in securities and need to be regulated as such. This had not previously been a problem, but there was a possibility that questions about the loans’ classification could have caused complications down the road.
“Our view was…we’d better fix the problem now rather than wait for problems in the future,” Renaud Laplanche, Lending Club’s CEO and founder, said.
Other peer-to-peer lending sites are certainly experiencing problems.
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Prosper—the largest peer-to-peer lending site in the U.S.—is facing some hurdles from the SEC. Last Wednesday, Prosper stopped allowing lenders to make new loans while the company waits for the SEC to evaluate its regulatory filings, a process that could take months, the New York Times reported. Prosper “now faces the damaging possibility that lenders may take their money off the site instead of waiting for the SEC to allow lending to resume,” according to the New York Times.
Meanwhile, Zopa has shut down its U.S. website —launched late last year—citing the difficulty of the U.S. credit crisis. The U.K.-based peer-to-peer lender is still operating in Britain, Italy and Japan.
But Lending Club’s decision to register with the SEC was not made solely because of regulatory issues. As a result of the registration, Lending Club is now able to offer and sell $600 million in Member Payment Dependent Notes. “Under this new offering, Lending Club lender members invest in Notes that have stated interest rates of 6.69 to 18.63 percent—after a 1 percent service charge is applied—and which represent portions of loans made to borrower members,” according to an official Lending Club statement. Lenders will be able to buy and sell the Notes to other members via a note trading platform operated by registered broker dealer Foliofn Investments, Inc., according to the statement.
“Many of our lenders were only lending money they knew they wouldn’t need for the next three years,“ Laplanche said. “Notes are tradable. If [lenders] need the money back earlier or if they want to reallocate their investments, they can sell their loans to other members. It gives them more liquidity”
These changes could also be good news for borrowers, as lenders may be more likely to lend larger amounts of money if they know they can get it back early if necessary. Lenders may also feel reassured by a peer-to-peer lending company that has “an additional layer of compliance and all the appropriate disclosures that have to be made when you register with the SEC,” Laplanche said. Now only 10 percent of peer-to-peer borrowers receive full funding, according to Loanio.com CEO and founder Michael Solomon, and this could give a significant boost to that percentage.
“Registering the program helped us solve future uncertainty and opened up a secondary market for the lenders, which is really the number one request we get from our lenders,” Laplanche said.
Since Lending Club first began operation in 2007, borrowers have received more than $19 million in loans. The company only accepts loan requests from members with good credit histories and approves only 14 percent of loan applications, according to Laplanche. Historically, the default rate on Lending Club’s loans has been approximately 2 percent, and interest rates vary from 6.5 percent to 18.5 percent. Lenders can bid on borrowers’ loan requests through the Lending Club website.
