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