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People-to-People Lending Now Online in U.S.

Calling it "a mixed brew of eBay, Friendster, and the local bank," the New York Times recently reported the launch of Prosper.com, a start-up company based in San Francisco that began operations in February.

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Prosper's users lend money to and borrow money from other people on the site at what the company says are better interest rates than those available through traditional financial institutions.

"We looked at eBay and said, 'Why can't we do this for money?' " said Chris Larsen, Prosper's chief executive.

Larsen, who previously founded and led online lender E-Loan, said Prosper could save borrowers and lenders money because it's a leaner operation than traditional financial institutions. He noted that consumers make, at most, about 4% on their savings accounts, which banks then lend to credit card customers at 14% or more.

"That's just a huge spread," Larsen said. "We think if you allow people to participate directly, it's a more efficient marketplace. People can make a better return on their deposits, which then become the source of credit to others."

On Prosper.com, prospective borrowers register with the site and allow the company to review their credit histories. Then borrowers post a loan request of up to $25,000, along with an upper limit for the amount of interest they're willing to pay. Loans are fixed rate, unsecured, and paid off over three years with no prepayment penalty.

Lenders essentially deposit their money with Prosper, which holds it in an interest-bearing account with Wells Fargo Bank. Lenders can either review the loan requests individually or fill out a form permitting Prosper to allocate money to borrowers who meet certain criteria. Chief among those criteria is the borrower's rating from the credit bureau Experian.

Borrowers can also join or create groups with defined interests or characteristics—similar, at least in spirit, to a "common bond."

Borrowers typically post their loan requests and any group affiliation, along with a description of who they are and why they need the money. They then wait a maximum of two weeks for lenders to bid in ever-lower interest increments for the right to issue the loan.

To help lenders minimize risk, Prosper permits them to finance just part of a given loan, so a typical lender may offer, for example, $100 at 6.5% interest toward a loan to someone with excellent credit.

Once the bidding is complete, and if enough lenders bid enough money to finance the loan at a single rate acceptable to the borrower, Prosper transfers the money to the borrower's account and establishes a monthly repayment system that withdraws money from the borrower's checking account. Should a borrower default, Prosper hires a collection company on the lender's behalf and alerts credit bureaus.

Prosper makes money by charging borrowers 1% of the loan amount, while lenders pay 0.5% of the loan's balance each year.

The community aspect of the site is an important component, said Larsen, describing it as, "Groups that you know and trust and want to support. If you're part of a group, the theory is that you'll perform better as a borrower than if it was some disconnected credit card company."

To those accustomed to brick and mortar, it might all seem a little edgy. But prominent venture capital firms, including Accel Partners and Benchmark Capital, have rallied around the idea. And Prosper's directors include individuals who sit on the boards of directors of Wal-Mart and eBay.

The site's two-month testing period went well, and as of early February, Prosper had attracted lenders with a total of about $750,000 to lend, according to Larsen.

Although Prosper is among the first to try this business model in the U.S., the idea has a track record abroad. Zopa.com, which operates in Britain, has more than 50,000 registered users, and at any given time about 15% of the users are either lending or borrowing money.

Richard Duvall, Zopa's chief executive, would not disclose the privately held company's revenues, but said he was "very pleased with our numbers"—so much so that he plans to start a site in the U.S. this year to compete with Prosper.

The group-affiliation component could be critical to these sites becoming profitable, indicated Asaf Buchner, a financial services analyst with the Internet consultancy Jupiter Research. He said Prosper's group leaders receive commissions on the group's lending and borrowing activities, which they sometimes share among the group.

"If the sites are able to recruit strong group leaders with strong affiliations, they shift the marketing burden to those people, who have the incentive to go after others to become part of the group," Buchner said.

The group approach enticed at least one of Prosper's lenders, Stephen Russell, to register with the site during its testing phase. Russell, the chief executive of a San Francisco technology company, has put up $25,000 to invest on the site. He has also started a group to lend money to people affiliated with the Climb High Foundation, which trains women in tourist destinations to become climbing and trekking guides.

"I'm not just optimizing the rate of return on my assets," Russell said. "It's also a way to facilitate lending that'll help women in developing countries. That takes the lending and borrowing process one step further."

This article was prepared by the staff at CU 360 and is published online at http://cu360.cuna.org. Reprinted with permission.

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