After shutting down its origination services for six months, Lending Club Corp. has started them up again and has developed the first U.S. secondary market in peer-to-peer lending.
The Sunnyvale, Calif., company said Tuesday that loans originated through its Web site are being funded by a Utah bank, instead of directly by individual lenders. Prosper Marketplace Inc., one of Lending Club's rivals, funds loans through the same bank and is working on a secondary market of its own.
The peer-to-peer lending market is still evolving, but observers said the fact that these two companies, among the biggest in this growing niche, have settled on a similar format likely has resolved the major questions about the business model.
That argument might be strengthened by the recent pullback by an older rival, Zopa Ltd., which used a different model in the United States. Though it still operates peer-to-peer lending sites in the United Kingdom, Italy, and Japan, it pulled the plug last week on originating loans through its U.S. unit. That unit allowed Zopa users to borrow money from one of six credit unions, and to purchase certificates of deposit through its site; they were required to choose a Zopa borrower who would receive part of the interest on those CDs to pay off their loan.
Renaud Laplanche, Lending Club's chief executive officer, said in an interview Tuesday that his company's new model "really works, and so we're going with it all the way."
Edward Woods, a senior analyst for Celent, a Boston market research unit of Marsh & McLennan Cos., said the model Lending Club and Prosper have chosen is the one most likely to thrive as this market matures.
"You'll see fewer experiments" along the lines of what Zopa tried in the United States, he said. "I think the simpler, the better."
Prosper disclosed in a Securities and Exchange Commission filing last year that it was developing a secondary market, but has said nothing more on the matter since. (Prosper spokespeople didn't return calls Tuesday.)
Lending Club said in a June filing that it was pursuing a system to enable its lenders to trade their assets. In the process of building that system, it also revamped the way it originates loans, using a model much like Prosper's.
Originally, Lending Club's loans were made directly from individual lenders to borrowers, Mr. Laplanche said; the lenders were issued "anonymized individual promissory notes," which could not be traded.
Now the loans are issued by WebBank, a Salt Lake City unit of WebFinancial Corp. of New York. People who enter agreements with borrowers through the site receive "member payment dependent notes," which can be traded on Lending Club's secondary market.
"There was always an uncertainty as to whether the loans being made by lenders on this platform were securities or not, and whether they should be registered," Mr. Laplanche said.
The secondary market will give Lending Club an edge in peer-to-peer lending during a weak economy, he said. "In this environment, there is definitely a desire from some of the investors out there for investments that represent less volatility than the stock market."
The default rate on loans issued through Lending Club is 1.6%.
Loans originated through the old model are still being serviced, but "at this point, the old notes and the old loans are not tradeable," Mr. Laplanche said.
(After largely shuttering origination services in April, Lending Club made a small number of loans financed by "high-net-worth individuals." It averaged $500,000 in volume a month that way, compared to $6 million in March.)
Mr. Woods said that Lending Club's secondary market "will appeal to a segment of the market, not everyone," though it is still important for peer-to-peer lenders to offer this kind of flexibility.
"This makes it much more attractive, because it takes that exposure away," he said. Requiring lenders to wait about three years to make their money back on the primary market "is one of the factors that holds people back from lending more."
Fynanz Inc., a peer-to-peer lender that deals exclusively in student loans, also offers to buy back its own loans, Mr. Woods said. "Because of that, it is more likely to have people willing to participate."
Zopa went a different way, trying to cut exposure by offering investors CDs instead of loans, but that went too far, he said, because CDs appeal to a different market.
"It took two things and put them together, and it didn't make a Reese's Peanut Butter Cup," he said.