LendingClub is also working with a Massachusetts-based investment firm called Arcadia, which has proposed to up the ante by applying leverage — that is, take bank loans to fund more loan purchases.
“This is without doubt an emerging asset class,” says Andrew Hallowell, an Arcadia founder.
Peer-to-peer loans can be high-risk. When they were first introduced, default rates topped 17 percent. The loans remain unrated because the asset class is still too new for Moody’s Investors Service and Standard & Poor’s to take notice.
“The big problem is the whole issue of credit risk,” says Bert Ely, a banking consultant in Alexandria. “To the extent the person putting up the money is relying on someone else to do the screening, you have to ask whether this is an appropriate investment for some.”
Peer-to-peer lenders issue their loans through Salt Lake City-based WebBank. They’re regulated by the Securities and Exchange Commission. Although LendingClub and Prosper recruit borrowers in more than 40 states, in at least 20 of them lender-investors are not allowed to be part of the process.
“If you are going to be a lender in this state, you have to be licensed,” says Ed Novak, a spokesman for the Pennsylvania Department of Banking and Securities. That rule, he says, applies to banks and individuals.
By 2016, peer-to-peer lenders in the nation will be originating $20 billion in loans annually, according to Jason Jones, an organizer of the LendIt conference and partner at Disruption Credit, an investment firm focused on online lending. That doesn’t include online loan programs not available to retail investors, led by Social Finance, or SoFi, which may hand out as much as $1 billion in education loans this year.
CommonBond is also in the student loan business, while IOU Financial lends online to small businesses.
David Schuette, a 50-year-old network engineer in Lakewood, Colo., took out a $10,000 LendingClub loan this year to consolidate credit card debt, on some of which he was paying 30 percent interest. LendingClub approved a three-year loan at 9 percent.
“It’s a great idea to have the little guys helping the little guys,” Schuette says.
The online lenders owe a debt of their own to the commercial banks, which have cut back on consumer lending. Americans had borrowed $854 billion in open-ended or revolving debt, such as credit card loans, as of the end of June, a decline of almost $170 billion over the July 2008 peak, according to Federal Reserve data.