The President of Prosper Marketplace talks Peer to Peer Lending and the Future of P2P
Today’s post is the first part of an interview with Ron Suber, President of Prosper Marketplace. Ron joined Prosper in 2013 to develop and execute on the company’s business development strategy. He previously served as a Managing Director at Wells Fargo Securities and as a senior partner at Merlin Securities.
The interview provided a ton of insight, more than eight pages worth, so I decided to split it into two parts. I’ll run the second part of the interview tomorrow. For a review of the two peer to peer lending sites, Prosper and Lending Club, click through to my previous post, Peer Lending Sites Reviewed.
I have included my own comments in italics so as not to be confused with Ron’s.
Thank you for your time Ron, I’ve been impressed with what you have done with Prosper just in the last year.
Thank you, always glad to talk with the peer to peer lending community.
First, tell us a little about your background and how you got into peer to peer lending.
I’ve spent twenty-five years on Wall Street. And I left a Wall Street brokerage business to become an entrepreneur in 2006. A friend of mine introduced me to the concept of peer to peer lending in late 2010 and I started investing for my own family office in early 2011. I really became enthralled with this new investable asset class.
P2P lending is really taking off, for both investors and borrowers. We highlighted the best peer to peer lending sites in a recent post.
This was a new opportunity — for the first time, to invest in consumer credit directly via an online marketplace, enabling individuals like myself to get a yield on their money, and a return on your money that you could see accruing daily.
And so I literally started telling my friends and people about this opportunity, with firms like Prosper and Lending Club. In January of 2013, my partners Aaron Vermut, Steve Vermut and I, along with Sequoia Capital, were able to invest in and take over the management and leadership of Prosper, which was America’s first peer to peer lending platform.
Since then we’ve grown Prosper from seventy employees to over two hundred employees, from $9 million a month in loan originations on the Prosper platform in February 2013 to $177 million dollars in loan originations on the Prosper platform in October 2014.
The growth has been explosive. I think one of the major reasons for this growth is because there’s such a mutual benefit to the retail and institutional investors in the loans, and clearly a benefit to the many borrowers. If we look at one of the big things that changed, it’s the type of borrower.
In early 2013, most of the borrowers that came to peer to peer marketplace lending platforms were for debt consolidation. These were people who had income and a job, but were stuck in a death spiral of credit card debt with a very high interest rate, no term and the minimum payment problem. So, in the earlier days, these borrowers were debt consolidations and we helped many people in the U.S. eliminate their debt and improve their credit scores.
What we’re seeing now is the evolution of marketplace lending, where people who want to buy something —a large purchase, an example could be: home improvement, special occasion, a second car or medical procedure – are coming to the marketplace lending platforms. They are realizing credit cards are good point of sale transaction device but a terrible place to borrow money.
They’re coming now to us, at Prosper, to borrow money for these large purchases and life events.
And the third type of borrower, which is relatively new and growing very rapidly, are entrepreneurs in our country who run businesses who need to borrow money for their businesses. They’re finding that these marketplace lending platforms, like Prosper, are a place where they can borrow, on their personal credit, for the purpose of their business. And they can do it quickly and easily and online 24 hours a day.
We’re finding so many borrowers now doing second and third loans because they understand now this is the new way and the smarter way to borrow.
It took Prosper 8 years to originate a billion dollars in loans through the platform. This year, the second billion were originated through the platform within six months. To say that growth has been explosive is an understatement.
Ron’s point to the increase in loan types, from debt consolidation to other loans and as a means of small business funding is an important one. It means that peer to peer lending is becoming more mainstream and an accepted form of lending rather than as simply a means to consolidate existing debt.
The market for small businesses, I’ve seen other sites going towards small business. Do you see Prosper offering a specific small business loan origination? Or do you see it remaining within small business loans offered on the personal side of credit?
We’ve decided at this time to stay 100% laser focused on consumer credit and not enter in the small business arena for lending today. We’re really confident that helping consumer with debt consolidation, with large purchase and consumers, based on their personal credit for their business, is the way that we can best help the consumer here in America.
There is plenty of growth ahead for Prosper in the consumer market. The Federal Reserve reports the consumer debt market has grown to $3.2 trillion dollars in the second quarter of 2014. Banks have yet to start lending in earnest because of heavy regulatory fees and high capital requirements. Financial institutions are sitting on $2.6 trillion in cash above the amount needed to meet federal requirements.
This is driving a lot of consumers, especially for larger purchases where they need loans, to peer lending. Once they see that the risks to peer lending are no different than for any type of loan, they return to the lending platforms for other loans.
The market for home and auto lending is obviously much larger than unsecured credit, how does peer to peer lending grow from unsecured personal loans and does it want to?
We see the marketplace lending arena and the industry expand beyond the consumer. You have a couple firms, we could take for example SoFi. SoFi is doing student loan refinancing and now they’re doing a very large business in mortgages. And you see some platforms doing consumer and business and you see lots of new platforms doing real estate with Realty Mogul and Patch of Land and numerous other real estate firms.
I think you’re going to see other areas expand into marketplace lending in addition to small business consumers, real estate, student loans, mortgages are going forward. Exciting new things in 2015 will be announced from the industry.
SoFi could become a big player in the online lending space though it is not a peer to peer lender where investors can participate. The site offers student loan refinancing with fixed rates between 3.6% and 7.5%, personal loans and mortgage loans with fixed and interest-only options. Click through this link to learn more about the loans and rates available.Â
Real Estate crowdfunding is something I’ve talked about on my other blog, Crowd101.com, quite a bit and is really opening up the market in crowdfunding. Just a year after Title II of the JOBS Act was passed, opening up crowdfunding to accredited investors, more than $217 million has been raised in equity and debt offerings.
When Title III of the JOBS Act is passed, allowing crowdfunding investment to people with less than $1 million in net worth, the available pool of investors could surge more than ten-fold.
What do you think every borrower should know about peer to peer lending?
I think the first thing borrowers should know is the importance of the platform validating and verifying: identity, income, and employment. The faster the borrower submits the documentation required, the faster the platform can do its job to verify the information they have submitted so that their loan can be listed.
This is critical for the success and speed of the platform to deliver the capital back to the borrower.
Any risks that borrowers should understand about peer lending?
I think the borrowers should focus on prepayment penalty, if any. Some platforms have them and some don’t. Prosper does not have a pre-payment penalty. They should also consider the rate they are quoted, make sure they understand all the fees, and also be comfortable with the speed and ease of use of the platform.
Fees are always the hidden trap of credit and loans. That 0% teaser rate may sound great on your new credit card until you find out there is a $100 annual fee and the rate you’re going to pay after the first year. And that’s not even considering where your rate will go if you miss a payment.
Origination fees for peer lending are relatively small. Prosper and Lending Club both charge a 2% to 5% origination fee on your loan, which they take out before disbursing the money to your bank account. Both peer lending platforms charge a 15% late fee if your payment is more than 15 days overdue but your rate will never increase.
I want to thank Ron Suber for his great insight into the peer lending industry and the time he devoted for this interview. We’ll run the second-part of the interview tomorrow including Ron’s thoughts on the upcoming Lending Club IPO, things investors should remember about peer lending and the future of the industry.