By Gareth Vaughan
Peer-to-peer (P2P) lending in New Zealand's likely to expand into areas such as real estate, student loans, insurance and mortgages, says the president of US P2P lender Prosper.
Prosper's president Ron Suber told interest.co.nz in a Double Shot interview there are four key areas where US P2P lenders are active at the moment. The four are real estate, student loans, consumer lending, and small business lending. Prosper launched in 2006. Harmoney, so far New Zealand's only licenced P2P lender, officially launched this month.
Suber, something of a P2P evangelist, is in New Zealand with his wife to visit their daughter at Otago University.
"There almost isn't a week that goes by that you don't see a new (US) real estate platform combining equity and/or debt financing in a peer-to-peer marketplace lending for real estate. (There's) Realty Mogul, Patch of Land, Asset Avenue and many, many more," Suber said.
"You also see it in the student loan business with $1.2 trillion of student loan balances outstanding. You see high growth firms in these online marketplaces like CommonBond and SoFi growing to help those students and help investors help those students."
"Clearly on the consumer (credit) side (there's) Lending Club and Prosper growing very, very fast. And then you see it a lot on the small business side with OnDeck and many, many other firms getting into this small business online marketplace for credit peer-to-peer lending. It's a very crowded vertical at this time."
Whilst New Zealand was likely to also see P2P lending in such areas, Suber said to expect it to broaden further still.
"I think you're not only going to see those verticals, but you're going to see others like insurance, and mortgages and other things that we did differently that our children and the platforms like Prosper and Harmoney will be adding other products to diversify and help more and more consumers in addition to consumer finance," Suber said.
In the US another development is the securitisation of P2P loans. A deal announced this week sees US$500 million worth of loans from the Florida-based CircleBack Lending sold to investment bank Jefferies where they'll be securitised, bundled into bonds and sold to investors. In this Financial Times story CircleBack CEO Michael Solomon acknowledges the US mortgage securitisation crisis that led to the global financial crisis, but says there's a key difference between that securitisation and what his firm is doing.
"The reason there was a mortgage crisis is because people were making loans to dogs and prisoners. We're not making loans to dogs and prisoners," Solomon's quoted saying.
Turning the ship around
Between 2006 and 2008 Prosper had serious problems with loan default rates hitting 36%. This culminated in a class action law suit brought against Prosper and its directors, which was settled for US$10 million. The claimants had sought more than US$47 million.
Suber and his partners took charge of Prosper's management in January 2013.
"We really changed a lot of things that the prior management team had done. Included in that, in the earliest version of Prosper the investors bid against each other to set interest rates and that clearly wasn't something that was working in the old Prosper. So we clearly set very clear and defined pricing and credit terms and really iterated the credit model so that it would work better for everybody, both borrowers and investors," Suber said.
"And we really went after a different, higher prime group of borrowers. So our average FICO score is now 705, and the average income of our borrowers is $80,000. And these are the right borrowers coming to our platform where we're now rejecting almost 80% of the borrowers who come to us that don't fit for the new Prosper model," added Suber.
"We've also introduced some institutions to the platform so that a healthy blend of retail and institutions help keep the Prosper platform working smoothly, which is why we've gone from $9 million in monthly (loan) originations to over $170 million this month in originations."
Suber, a former managing director of Wells Fargo Securities, said banks were starting to wake up to how P2P market places can help them and their customers.
"Often banks don't want to do loans under $35,000 and they can use us to do the work, to do the credit, to do the processing. And then banks can come in and buy loans and many do, primarily the top level, AA and A, to hold on the banks' balance sheets. So banks can put their capital to work, increase the yield on the bank's balance sheet, and own consumer credit without having to do all the work."
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