Do you remember the excitement and hoopla surrounding peer-to-peer (P2P) banking in the U.S. just three years back? Borrowers flocked to these websites to make loan requests and lenders were excited with an opportunity to play banker and earn higher returns than they could through traditional avenues. Then the credit crunch hit, default rates soared across all credit levels, lenders quickly discovered that they had seriously under priced risk in these consumer loans, experienced capital losses and loan originations just plummeted.

Against this backdrop, CommunityLend, a P2P service quietly launched in Ontario and Quebec early this year. Like Prosper and Zopa, CommunityLend operates an online market place that matches borrowers with lenders. Borrowers are charged interest on unsecured loans that CommunityLend calls competitive to that charged by banks and credit card companies. For instance, CommunityLend suggests lenders charge a minimum interest rate of 6.00 to 6.25 percent on loans to borrowers with the top credit rating — more expensive than the Prime plus 3.25% (about 5.5%) charged by the major banks on unsecured lines of credit but almost certainly much less than interest rates on credit card balances.

If you are excited about signing up as a lender with CommunityLend, you might be out of luck. Only accredited investors such as institutions and high-net worth individuals with financial assets exceeding $1 million can sign up to become lenders. CommunityLend is still tiny — just $97,000 in loan requests accepted so far but it is still early days. The accredited investor requirement is probably a huge obstacle to widespread adoption in the two provinces. This is not necessarily a bad thing because the past three years have clearly demonstrated the perils involved in retail investors trying their hands at becoming part-time bankers.

This article has 18 comments

  1. Perhaps these services could reduce risk and attract more lenders by pooling these loans and then slicing them into tranches. They could then sell these as securities with different repayment priorities and get each type evaluated by the rating agencies.

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  3. Do you have any experience with P2P lending? It seems to be an emerging trend…

  4. Hey CC

    On the topic of peer to peer lending and CommunityLend in particular, I actually had the opportunity to interact with Colin Henderson, the Chief Technology Officer and Co-Founder of CommunityLend a little and enticed him into writing an article on my blog with regards to the role of CommunityLend.

  5. Sounds to me like the neighborhood loan shark has just been repackaged and set up shop with a more ‘respectable’ store front. Aren’t payday loan providers (not that this is at all the same thing) nothing more than conventional, real-world store front loan sharks?

    I kind of feel sorry for those who pay such relatively high borrowing rates because they feel they need that money either to make ends meet (very sad), or to get the latest upgrade (very stupid, in my opinion). However, if I were a qualified investor, would I be interested in earning these higher returns? Absolutely. Ah, ever the dilemma. Ethos vs. Economics. I guess if I were making the loan to someone who is trying to get out of credit card debt I would not have an issue with it, so long as the credit card balance I assumed the risk for isn’t re-added to the card through new purchases.

  6. As you rightly allude, the journey has been long and somewhat arduous. The peer-to-peer lending model that we now have has evolved considerably from the original one in 2005/6. However, while the implication of securities regulation has brought some restriction from that earlier model, it has has also brought a new sense of innovation and legitimacy for the business of peer-to-peer lending. The example in the comment above about different methods of placing money in the system is a great example.

    That is a long way of saying that while the model is not what was originally anticipated, it is one that is now ready to grow and thrive.

  7. Canadian Capitalist

    @Michael: Somehow I doubt these loans will get AAA ratings anymore after the debacle the rating agencies had with ABCP and sub-prime RMBS.

    @Doctor Stock: I don’t have any experience with P2P lending. I explained in this post why I don’t fancy becoming a part-time banker.

    http://www.canadiancapitalist.com/communitylend-people-to-people-lending/

    @Arjun: Thanks for the heads up. Interesting post.

    @AKA: Leaving aside ethics, knowing everything we know now about ABCP, sub-prime RMBS etc. I would personally avoid this altogether. I feel that bonds, stocks and REITs are enough asset classes for retail investors like me.

    @Colin: I’d be interested to know how P2P lending has evolved. What is CommunityLend doing differently now? I can see why large institutional investors might be interested in this but I don’t see why retail investors should bother with P2P lending. I’d be interested in your thoughts.

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  9. Really, P2P lending is basically just what banks and credit unions do on a daily basis – except with the middle-man having a much smaller role.

    The problem I see for lenders, of course, is having your eggs in one basket – being undiversified. Instead of lending to a basket of borrowers through, say, a mortgage fund, you are loaning to one specific person. And, of course, liquidity. You can’t just say one day – hey, it’s spring time and I’d like to call that loan to buy myself a boat – it simply doesn’t work like that…

    My theory is that if you don’t like the commissions that the middleman is charging – then buy shares in the middleman. Buy bank shares, or non-bank mortgage lenders. It’s a free country.

  10. Perhaps some of the banks may sit up and take notice. It has been my experience with clients who wish to consolidate their debts that the banks will only offer consolidation loans as lines of credit with variable rates of prime +++++. The whole idea of consolidation is to reduce the monthly payments required, pay off the high interest credit cards and lines of credit and then, hopefully, learn not to get back into debt. With the variable rate loans offered it is way too tempting for a client to borrow back whatever they have paid off and they end up with even bigger debts. A fixed loan with a short (3 years) time line and a fixed rate of interest is what is needed to get these people back on track. Banks are definitely not interested in helping the people they’ve put into their high interest credit cards and personal lines of credit pay them off and get out of debt. Even though these loans from Community Lend may be at higher than normal interest rates it will probably still be less than the 19-21% they were paying on a credit card balance.

  11. I wouldnt want to be lending my money on these sites, I was reading about them before, and there was a lot of complaints about deadbeat borrowers..no thanks.

  12. @AKA … I have to take exception to the loan shark reference. I think you mistake P2P lending for payday lending. Suggest you take a closer look at the nature of the beast that has received licences under the Securities regimes then we can debate.

  13. @Colin… I’m sorry you take exception to the loan shark reference, and am a little confused as to why you would, since CommunityLend itself isn’t a lender, only an alternative intermediary (compared to conventional banks) between lenders (bondholders) and borrowers (issuers).

    Further, as a Co-founder of CommunityLend (as referenced by Arjun R above), you personally can not be involved as a lender/investor or borrower/issuer pursuant to the decisions of the ‘Securities regimes’ that have issued licences to allow CommunityLend to operate. I should qualify that I have only looked at the OSC filings, and nothing for the province of Quebec.

    I know that P2P lending is nothing like payday loans. I do believe I said as much in my initial post. I know that affordability and credit rating of the issuer is a factor for P2P, whereas ‘loan sharks’ don’t really care about protecting the borrower.

    I apologize for using a derogatory term with such a negative connotation to it, but as a backhoe, shovel, and spade all have different capacities and strengths, they all essentially perform the same task.

  14. @AKA … thanks for that and no harm done. I am probably overly sensitive about the nature of peer-to-peer lending as we seek to build the model with a clear understanding that it is designed for good quality borrowers. So I tend to leap on any potential reference that might take the brand in another direction.

    Thank you for the comment.

    Colin

  15. What are the repayment rates like on Prosper and Zopa?

  16. RE Rates: Lendingclub.com and zopa.co.uk have that information on their home page. Given this is securities information best to get from the source. Lendingclub compare their rates to other fixed income and other investments.

  17. @SueD…
    I disagree with your comment. As a lender for a major bank, I will always look at all options for a client, and then help them to choose the best one for their needs and financial abilities.
    Once someone is fully indebted to credit cards, finance loans and other store cards, refinancing into a personal loan with a fixed rate is usually not affordable for them.
    First, a consolidation loan of $15,000 taken over three years at a fixed rate (rates are usually up above over 9% and generally start at 11 or 12%), will need about $485.00 per month to service (at 10%); unfortunately, a lot of clients can just not afford this.
    The problem started with credit card companies, store cards, and dealer financing not taking a true picture of a borrower’s ability to service their debt and giving them way to much and while they may have been able to manage their minimum monthly payments to start, they can not anymore and consolidating into a three or even a five year loan will not improve their cash flow (when we have done this for clients, most of them time they come back in a year or two with credit cards up at the max and new don’t pay ’till May (or some other catchy debt trap) and they are now worse off.
    Personal lines of credit generally have a 3-5% lower rate than a personal loan, and with a minimum payment of 2% of the outstanding balance, it is the only way to get someone approved. Of course, they need to have the necessary financial fall back to support the request either way, so this is where secured lines against homes come in.
    If we can get a personal loan approved, I will almost recommend a variable rate. Why? Because, the rate starts about 5% lower than the fixed rates and in my seven years doing this, the variable rate on a personal loan has never surpassed the fixed (not to say it won’t, but I have not seen in yet). Also, I usually have more discretion on the variable rate.
    Anyway, sorry for the long response. I am late studying, and just felt that your comment was not accurately portraying what I know I try to do for my clients at the bank.

  18. whoops, late night typing without rereading before hitting send is not a good idea. I apologize for all of the typos and grammar gaffs above. I hope that the point got across.

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