I recently got an e-mail from a reader who was concerned about the long-term stability of peer lending outfits like Lending Club. In it, he asked:
Is there any credible data as to how long companies such as Lending Club are likely to persist (5, 10, 20, 50 years)? That’s probably one of my biggest concerns… I worry that I’ll add money every month until one day they file for bankruptcy, and I’ll lose everything. I’m very interested in your thoughts.
That’s a great question, and unfortunately I don’t have a crystal ball. I can, however, comment on what might happen if Lending Club gets into financial trouble. Here’s what the Q&A in their prospectus has to say about it:
Q: If Lending Club were to become subject to a bankruptcy or similar proceeding, who would service the member loans?
A: We have executed a backup and successor servicing agreement with Portfolio Financial Servicing Company (“PFSCâ€). Pursuant to this agreement, PFSC stands ready to service the member loans. Following five business days’ prior written notice from us or from the indenture trustee for the Notes, PFSC will begin servicing the member loans. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.
In other words, if Lending Club runs into trouble, there are plans in place for a backup servicer to step in and take over the loan servicing.
That being said, there is a large section in the prospectus devoted to risks of investing through Lending Club. Included in this section are a number of possible risks associated with Lending Club itself.
They go through a variety of scenarios, but the upshot is that a bankruptcy or similar proceeding could cause delays in payments on notes and, in the extreme, it’s possible that you could wind up as an unsecured creditor of Lending Club.
It’s worth noting here that uninvested funds are held in a Wells Fargo bank account that offers “pass through” FDIC coverage to individual investors (subject to FDIC limits).
So… What does this mean for me? I remain cautiously optimistic, but Lending Club only represents a small percentage of our overall portfolio. As such, I’m comfortable with the attendant risks.
Interesting piece on Prosper Loans Marketplace.
http://www.thebigmoney.com/articles/money-trail/2010/01/18/you-are-unlikely-prosper
Prosper is in the process of settling with states individually and paying fines.
This link (among others) were provided in response to your December 18 comment that, as a long-time lender, you were unaware of Prosper having to deal with any legal problems.
Havvy new year, everyone.
Just throwing it out there:
That link is dated May of 2009 and Prosper members are allowed to invest/borrow in Montana (http://www.prosper.com/help/investing.aspx#gettingStarted)
So I guess everything was cleared up?
http://www.sao.mt.gov/news/20090519Prosper.html
Montana State Auditor’s Office Statement:
State Auditor and Commissioner of Securities and Insurance Monica Lindeen today sanctioned a San Francisco company whose unregistered securities schemes defrauded nearly $400,000 from Montana investors.
Lindeen’s office signed a final Consent Agreement and Order with Prosper Marketplace, Inc., a San Francisco-based online “peer-to peer†lending service, to resolve matters relating to unregistered securities and securities fraud.
“My message is clear,†Lindeen said. “If you prey on Montana investors with unregistered securities schemes, or seek to profit from duping unsuspecting Montanans we will find you and we will punish you.â€
[…]
“Several states had been investigating Prosper’s activity last year and were considering or preparing enforcement actions.”
Evan – there’s also some information available regarding the class action suit here:
http://prosperclassaction.wordpress.com/
The blind rage came from the tone I perceived if I perceived incorrectly, I apologize. Aagain, I still feel that you genuily hate the company.
As far as the legal ‘stuff’ – are they currently in trouble with the SEC? The class action – I found Case CGC-08-482329, is this what you were referring to?
From what I can tell from the Court Docs it is currently in mediation. Do you have any information?>
From a quick review of the form, I really believe that Prospers.org just seems like a bitchfest.
It seems Odd that LendingClub would enter into an agreement that FCN highlights in the FAQ, but prosper hasn’t?
Evan – I am quoting my entire post – and I’d like you to point out where you think you are seeing “blind rage?”
“Evan – Prosper now actually owns the loans (read their S-1 filing). The “lenders†are unsecured creditors of Prosper’s debt. As for Legal trouble, I’d say that being shut down by the SEC for selling unregistered securities does indeed constitute “legal trouble.†Of course, Prosper now finds itself in the middle of a related class action lawsuit. Again, legal trouble.”
I have merely pointed out that the Prosper platform has fundamentally changed since the re-lauch, which has added another layer of risk to the lenders related to the notes.
Information regarding the class action suit is available from the we site of the Superior Court of California – County of San Francisco. I would assume that the Court would constitute an acceptable source – even for you.
Prospers.org is hardly a hate-group. It is the largest and most active site for Prosper participants available anywhere online.
From your Forums it seems that RosenLegal was the firm who took it on? Is that right?
If so, is there a reason it isn’t on their website? Did it get moved to another firm?
I don’t think I love prosper as much as you clearly hate it (even linking to a bitch-fest forum about the subject of hating Prosper lol), but I think I should respond.
“I’d say that being shut down by the SEC for selling unregistered securities does indeed constitute “legal trouble.â€
They were served with a C&D letter just like Lending Club was in the April before over the definition of a what a security is. Regardless, Prosper has since resumed lending in most states, so I think they cleared that trouble up.
As for the class action I can’t find anything legit on it, and would appreciate any links, as would any reader of this blog (please don’t post garbage hearsay from your forum or weird blog).
I am not IN LOVE with Prosper, nor do I even have an affiliate relationship with them, I just think you REALLY hate them and I always find blind rage amusing.
Evan – Prosper now actually owns the loans (read their S-1 filing). The “lenders” are unsecured creditors of Prosper’s debt. As for Legal trouble, I’d say that being shut down by the SEC for selling unregistered securities does indeed constitute “legal trouble.” Of course, Prosper now finds itself in the middle of a related class action lawsuit. Again, legal trouble.
John,
They don’t seem to be making the risky loans (we=lenders) are…they just take their piece of each loan through fees
I wouldn’t be surpised if they do go out of business. Risky loans go bad.
John DeFlumeri Jr
@Evan – That was what I was referring to. I didn’t remember the details of what they were shut down for. I just knew I couldn’t really use the service for almost a year, which (while I understand the reason they did it) kind of made me forget about the site and move on…
“unfortunately [prosper] experienced some legal trouble and had to re-structure”
Do you have a link? I have been a member of prosper since 2007 and don’t remember any legal trouble. They did shut down for a good amount of months (just as lendingclub did) as to register with the SEC so they could create a secondary market for notes
I just listed with LC. Talked to Rob yesterday who ‘walked’ me through the whole program. You can see all the current posting about LC on my blog. I love LC. I was skeptical about its longevity, but I have no doubt it will last and prosper. Plus, if anything did happen they are backed by a bank or service to cover it. Great, great person. I should be their new spokesperson, cuz I did a whole homemade audio endorsement on it yesterday. 😉
It is good to see that LC is thinking long term. This allows me to consider P2P lending as a more secure option as an alternative asset class within my overall portfolio. In my case, I have about a 38 yr time horizon before retirement and I’m two years in. What would you consider an appropriate asset class % for Lending Club? For me specifically, I am an aggressive-moderate when it comes to risk. I would love to see a post on your thoughts on this as well.
Thanks!
“In other words, if Lending Club runs into trouble, there are plans in place for a backup servicer to step in and take over the loan servicing.”
This is good news, thanks for posting this!
Great reader question–I have been interested in Lending Club for a while now, but I definitely didn’t consider it from that angle.
We experimented with Prosper, which was another peer-to-peer network, but unfortunately it experienced some legal trouble and had to re-structure, and we also lost out on a few loans. Left a bit of a sour taste in my mouth, but we’ll probably look at LC pretty soon.