How Technology Sharpens Online Loan Scoring and Matching

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Modern technology allows a new entrant in the peer-to-peer lending space, SoMoLend LLC, to create a more targeted matching system for small-business borrowers and lenders.

SoMoLend certainly has more tools at its disposal than the earliest P-to-P players did. When P-to-P lending debuted in the U.S. in 2006, Facebook was still months away from opening its site to the general public and the original iPhone was a year away from being launched.

The Cincinnati company, whose name is an abbreviation of Social Mobile Lending, says it has developed a patent-pending credit scoring system that links lending rates to social media rankings, much the way eBay lets its community rank sellers. It also uses a mobile service to make the borrowing process more personal.

While the concept is not entirely new — five and a half years ago, a nascent Prosper Marketplace Inc. fashioned itself as the eBay of lending — SoMoLend is already claiming early success due largely to its ties to the banking community.

It has the backing of KeyCorp, of Cleveland, which says it is intrigued enough to lend up to $50 million to the businesses that SoMoLend is targeting. These businesses are primarily in the bank's 17-state footprint, and have five or fewer employees.

The lending platform is consistent with Key's focus on the small-business market, where it has committed to lending $5 billion through 2015, Maria Coyne, executive vice president and business banking segment head for Key, says.

"We are always looking for alternative ways to understand people's capacity and ability to repay," Coyne says.

SoMoLend was founded by Candace Klein, the company's chief executive, whose previous company, Bad Girl Ventures, also received support from Key. Bad Girl helped women-owned ventures secure financing and business education.

Though still in beta, SoMoLend has signed up 100 businesses looking for loans. Key is currently the sole lender, and Klein says she is in talks others.

SoMoLend assumes none of the borrowing risk, but it performs some of the underwriting functions, including the credit scoring and setting the rates for the loans, which can run between 3% and 22%.

SoMoLend examines traditional lending criteria, such as debt to income ratio, credit score and the number of years in business. It also looks at community reputation earned as borrowers repay loans.

Businesses that may not have qualified for traditional bank financing can solicit small loans from a broad base of lenders on the network, spreading risk and giving insight into their social community, Klein says. So if a small business is looking for a $10,000 loan, it can ask for $1,000 from ten different lenders (which can be institutions or people).

As the business repays the loan, it builds up a good credit history in the community, which may qualify the borrower for cheaper rates on future loans. Banks can factor this alternative credit history into their own credit decisions

"We are encouraging borrowers to share with friends and family members who will be most likely to lend to them at lower rates," Klein says.

SoMoLend collects a fee of 2% of the total loan from the borrower once a loan has been made. From lenders, it collects 1.8% of total loans made each year.

SoMoLend's mobile application uses a phone's GPS to connect borrowers and lenders in proximity to one another.

The mobile service appeals to Key, because it offers additional insight.

"Social media is interesting to us and we want our clients to have the option to have a face-to-face relationship," says Coyne. "We also like to meet our borrowers and know our client."

When Prosper launched in the pre-iPhone era, it allowed users to identify one another by affinity group, such as if lenders wanted to invest only in borrowers who went to the same college they did or who live in their community.

However, some of Prosper's eBay-like traits faded as the company matured. Today, for example, it no longer lets users set loan rates.

"Prosper initially had that idea of peer to peer and gradually realized there were no peers on the money side, so it wound up becoming like a finance company with institutional lenders," says Christine Pratt, a senior analyst for Aite Group.

SoMoLend may have different luck because of Key's influence, she says.

SoMoLend's model functions somewhat the way a prepaid credit card program works, says Les Dinkin managing director at Novantas LLC. Instead of putting up money to gain credit, small-business borrowers put up their reputation by soliciting loans from family and friends.

"Banks want to lend to small businesses, however they are looking for additional insight that might be available from working with non-traditional sources," Dinkin says.

But SoMoLend's borrowing base may be too small, some analysts say.

Other loan facilitators, like Weemba Inc., a Miami company that focuses on providing loans to consumers, appeal to a broader base of borrowers and are likely to be more successful, Pratt says.

"Weemba seems to have gathered a fair amount of lenders looking at a bigger and more diverse loan pool that is consumer-based," Pratt says.

Peer-to-peer lending sites suffer from consumer and financial institution apathy, analysts say. Only 10% of consumers and 7% of financial institutions would be likely to participate in peer to peer lending, according to recent research by Forrester.

At the same time, the P-to-P model lets banks experiment with ways to gauge potential customers through social media without investing a lot of money, says Peter Wannemacher, an analyst for Forrester.

"It is a smart bet by Key, [even] if they are just lending their brand," Wannemacher says.

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