3c hapter - Index of

134 Locavesting
his company’s great experiment in market libertarianism didn’t
pan out. Today, the company takes a more paternalistic view. It
has tightened its lending standards, instituting a minimum FICO
credit score of 640, up from 520 (rendering a broad swath of its
former borrowers ineligible). And it has added more credit analysts
to its staff. Default rates are back in check—around 6.5 percent
averaged across all categories, according to the web site (although
most outstanding loans are still early into their loan terms and
could still go bad).
As Prosper scrambled to regroup, Lending Club, a rival peer
lender based in Redwood City, California, gained on it. The site,
which started out as a Facebook page, completed its SEC registration
in 2008, just before Prosper was shut down. From the start,
it employed higher credit screening standards. It also debuted
a number of innovations, such as affi nity- matching technology to
connect investors and borrowers based on factors such as where
they went to school, where they grew up, or their professions.
That’s intended to help investors fi nd borrowers with which they
share some sort of social bond, on the theory that such social connections
promote repayment. In August, 2010, The Lending Club
issued more than $12 million in loans, a record monthly amount
for the P2P industry.
Larsen argues that his company and other P2P lenders
should be overseen by banking regulators or the new Consumer
Financial Protection Bureau headed by Elizabeth Warren. His
lawyers lobbied for such an arrangement, and a bill passed in the
House of Representatives. The Senate, meanwhile, ordered up
a study of P2P lending and how it should be regulated. A report,
along with recommendations, is expected to be completed by the
Government Accountability Offi ce sometime in 2011.
The saga has cast a pall over the burgeoning P2P market.
“I don’t think people realize the damage that’s being done
by what’s not being allowed or the uncertainty that’s being
created—it just stops ideas cold,” says Larsen, who also
cofounded mortgage- lending site E- Loan.com in 1997. “You have
a situation now where VCs have shied away from fi nancial technology
because of that tremendous uncertainty, even though