Social Lending Refuses to Die

May 20, 2009

Mark Condon

Despite an SEC crackdown, social lending networks are surviving—even prospering.

Amid the doom and gloom surrounding the economy and the financial services industry, you’ll be happy to learn that Uncle Joe and Aunt Millie can continue to lend money over the Internet to strangers out West who want to consolidate their credit card debt. Or they can help underwrite the person starting a nail salon two states away from their hometown.

Social lending refuses to die despite a Securities and Exchange Commission (SEC) crackdown last year on auction sites such as San Francisco-based Prosper Marketplace Inc., and Sunnyvale, Calif.-based Lending Club, where borrowers post their needs and investors bid to help underwrite the loans. In fact, even more sophisticated models are emerging as the networks address the need for more operational transparency and greater regulatory oversight.

As these networks survive and even prosper, they’ll be increasingly credible options for consumers. The Wall Street Journal estimates the social lending market in the U.S. may surpass $2 billion by 2011. While that’s still a tiny share of the massive consumer lending market, it’s a huge jump from 2005 when the market was about $115 million, according to a “CBS News” report. notes that four-year-old Prosper is the largest social lending network in the U.S. and owns an estimated 80% of the domestic market. Prosper’s market share may shrink for the short term, thanks to the SEC’s cease-and-desist action against it last November. The SEC claims the loan notes Prosper issues to the investors underwriting the loans are securities that must be registered with the SEC.

Prosper still services loans predating the SEC order, but it’s not underwriting new loans until the commission approves its registration paperwork, which could occur anytime.

Loanio Inc., a smaller player in Nanuet, N.Y., also is in a “quiet period” while awaiting an SEC ruling.

Lending Club, on the other hand, is back in business following an SEC-imposed six-month hiatus. It claims its volume has doubled since fourth-quarter 2008. It expects to process $150 million in loans this year and more than double that amount by the end of 2010.

Not everyone has agreed to cooperate with the SEC. Zopa, the London-based granddaddy of Internet-based social lending, closed shop in the U.S. rather than submit to regulatory oversight. But all this and the rise in recession-spurred delinquencies and defaults haven’t stopped new start-ups.

Like all innovators, the latest entrants adapt and evolve with a different twist on the business model. Consider Pertuity Direct, Pittsburgh. Rather than allow individuals to fund specific loans, it uses an SEC-approved mutual fund to underwrite its entire loan portfolio. Individuals invest in the mutual fund.

GreenNote Inc., Rancho Cordova, Calif., targets the student loan market. While it directly connects lenders and borrowers, the funds flow directly to the schools, not through students’ accounts. The interest rate is pegged to the Federal Stafford Loan Program. Students must begin repaying their loans within six months of graduation and pay off the full amount within 10 years.

It’s difficult to predict what impact social lending will have on credit union operations over the long haul. It would be a mistake to underestimate the trend. The survival of the social lending networks and their continual evolution indicate how difficult it is to kill innovation.

These networks are taking advantage of the credit crunch, positioning themselves against traditional lenders in their marketing campaigns. Pertuity Direct founder/CEO Kim Muhota speaks of linking social networks, capital markets, and traditional banking on one seamless platform—one that avoids the “hassles, high costs, and inefficiencies of your traditional banks or credit card companies.”

Muhota doesn’t mention credit unions, but he’s targeting prime borrowers who are used to transacting business online and, in many cases, prefer the ease and convenience of the virtual world.

That sounds like a lot of credit union members.

MARK CONDON is senior vice president, business and consumer publishing, for the Credit Union National Association. Contact him at 608-231-4078 or at