Prosper Marketplace Inc. plans to launch a secondary market for bank loans today.
The market will be limited to California at first, but Prosper will initially provide an open market for bankers to resell loans they want to get off their books, a first among peer-to-peer lenders, and will eventually include loans made through its online trading system, which a rival is already doing.
"The open market now, for the first time, allows other financial institutions to list loans they have already made," said Chris Larsen, Prosper's founder and chief executive. "We're trying to make this be sort of a new way that you can get liquidity. This enables things you could never do before."
The peer-to-peer loan facilitator said that it was developing such a market for bank-issued loans in a filing with the Securities and Exchange Commission in December, but at the time the company would not discuss its plans.
In a follow-up SEC filing this month, Prosper said that banks could resell loans with fixed interest rates and terms of up to seven years. The loans can be secured or unsecured, but they cannot be for real estate.
The loans must be current, and the borrower must have made at least three payments.
Larsen said lending banks would continue to service the loans and could sell them at a premium or a discount.
At least one banking company is already planning to use the system, he said, though he would not name it.
Prosper's main business is facilitating loans between individuals; prospective borrowers create online posts explaining why they want the money. People with money to lend select the borrowers they want to fund.
The San Francisco company stopped accepting loan requests in October, and the SEC raised questions over whether the loans were securities and therefore subject to more regulation.
As Prosper and others in the peer-to-peer market became more interested in offering users a secondary market to buy and sell the notes, it became clear that regulators viewed the instruments as securities.
The company is still waiting for regulatory approval for the secondary market for loans made through its site, but got the go-ahead from California officials to start the open market for bank loans in the state.
"We can be a little bit more nimble than the SEC," said Preston DuFauchard, the commissioner of the California Department of Corporations. His office oversees lending and securities regulation in the state, providing him "a different regulatory field of vision" than counterparts in other states.
Larsen said he expects to resume operations nationwide once he receives approval from the SEC; though he could not say when that might happen.
For now, consumers in any state may request a loan through Prosper, but lenders must live in California and banks that want to sell a loan through the open market must be based in California.
Edward Kountz, a senior analyst for e-business and channel strategies at Forrester Research Inc., said a new way to resell loans will be appealing to bankers.
"Institutions may be somewhat cagey up front about doing that, but I think that in the current environment, too, when it becomes clear that there is an opportunity to differentiate effectively, we'll see a willingness to try," Kountz said. "It'll probably take some time, because things are relatively new."
In addition to earning Prosper fees on the bank loans sold through its site, Larsen said, the open market could make his company better known among mainstream banks.
Kountz said that could be important for Prosper, because there is still low awareness of such companies among potential users. In a survey last year, 14% of consumers said they were aware that peer-to-peer lending companies existed but had not used one, and just 2% said they had participated as either a borrower or lender on such a site.
Brian Goerke, a spokesman for PNC Financial Services Group Inc., said that he was unfamiliar with Prosper, and that his company is not wanting for liquidity and is not likely to use Prosper's market. "With an 88% loan-to-deposit ratio, I'm not sure PNC would be the right audience for Prosper."
Lending Club Corp., a Prosper rival, stopped accepting loan requests in April of last year while it revised its business model and developed a secondary market for loans originated through its Web site. It resumed operations and introduced the secondary market in October.
Renaud Laplanche, Lending Club's CEO, said that there has been strong demand from users for the secondary market.
"The main appeal of the secondary market is really to give liquidity to lenders and make sure that if they do want to sell … that they can get that money back," he said. Most loans sell at or near par value, and most sell within two days.
Laplanche said Lending Club has no plans to develop an open market for banks to sell their loans through its site.
Loan requests made on Prosper often include a variety of personal details, and even photos, all of which is meant help the borrowers make the case that they are a good risk. To persuade Prosper's mainstream users to purchase loans from banks, Larsen said, banks might need to create similar posts with details about individuals whose loans they are selling.
However, bankers do not typically collect these personal details when people request loans; Larsen said that lenders might start to request more information from borrowers, especially if they plan to resell the loan.
Lenders might even offer a discount to borrowers who provide such information, he said, since it could makes their loans more likely to sell through Prosper.
"Certain things, social pieces of information, they have value," Larsen said.
Bobbie Britting, a research director with the consumer lending practice at TowerGroup Inc., an independent research unit of MasterCard Inc., said that banks have a long history of using personal details in making lending decisions, but they moved away from this model as automated underwriting became the norm.
Now banks are trying to find ways to incorporate more information about borrowers into the lending process, Britting said. "In general, lenders are trying to collect more and different types of data," she said.
"Banks used to use people to underwrite loans instead of underwriting systems," she said. "Personal lending used to be much bigger. It just wasn't online."
Prosper's wide range of users could provide banks with new insights on specialized fields, Britting said. For example, someone with a background in horse breeding might be willing to lend money to fund a breeding business if the borrower seemed knowledgeable.
"These different pieces of information are important in making the lending decision," she said, since banks may not be able to judge an applicant's expertise in such a field, but Prosper gives banks access to people that can.
"There's room for banks to make money there, but they can't use their same bank products. They have to create new products and … new ways of looking at the customer," Britting said.