The online person-to-person loan facilitator Prosper Marketplace Inc. has partnered with a Utah industrial bank, a move aimed at streamlining its lending policies and allowing it to offer consistent terms nationwide.
Until last month loans initiated through Prosper were governed by agreements the San Francisco company had struck with regulators in each state. Those agreements led to interest rate and loan limits that varied significantly from state to state, and some prospective borrowers in states with low rate caps could not offer rates high enough to attract enough lenders.
By originating loans through WebBank, a Salt Lake City unit of WebFinancial Corp. of New York, Prosper now can set up loans adhering to Utah's regulations almost anywhere.
"They have the ability to export Utah's rate cap," Chris Larsen, Prosper's chief executive, said in an interview last week. "It allows us to really compete more on an equal playing field with the credit card companies," which also can offer borrowers identical terms nationwide.
Prosper began offering loans through WebBank last month after negotiating the agreement for about six months.
Regulators have been wary in recent years of arrangements in which nonbanks offer financial services by partnering with banks or obtaining charters, especially industrial loan ones. Wal-Mart Stores Inc. and Home Depot Inc. tried to purchase banking companies with ILCs but dropped their bids after encountering strong resistance. Several commercial banks have pulled back from providing funding to payday lenders, in response to regulatory efforts to curtail short-term lending practices widely seen as predatory.
Prosper's partnership seems unlikely to come under such scrutiny. The Federal Deposit Insurance Corp. has singled out the company as an alternative to payday lenders for short-term loans, and Mr. Larsen was invited to speak last year at an FDIC conference on low-value lending.
The strategy of partnering with an industrial loan company is also more expedient for Prosper than trying to obtain one of its own, since the FDIC is moving very slowly on ILC applications.
All Prosper borrowers can now request loans with rates as high as 36%. Few people end up paying rates that high, but Mr. Larsen said the higher cap makes it easier for would-be borrowers to offer rates high enough to attract lenders.
Under the previous arrangement, for example, rates were capped at 6% in Pennsylvania and 16% in New York.
When Prosper was regulated by the state agreements, about 40% of the total loan volume came from states with low rate limits; "naturalizing the rate environment" by removing those limits enables people to offer higher-rate loans in states with low caps and "makes the marketplace dynamics better, more liquid, and more uniform," he said. "It just puts a lot more loans in the hunt."
The new setup is already increasing loan volume, he said, though it is too soon to quantify the gains.
Prospective borrowers request loans and specify the rate they are willing to pay, and potential lenders make bids to fund all or some of a loan.
WebBank is technically the lender, and the people who agree to lend through Prosper are buying notes from the ILC, which does not fund loans until it has commitments from enough people to cover the loan amount.
For regulatory reasons, Prosper still prohibits lenders from making loans to people in South Dakota, and has retained its rate caps of 12% for personal loans and 18% for business loans in Texas.
Prosper is expanding its marketing efforts; it began testing a television campaign two weeks ago in Minneapolis. Mr. Larsen said the new setup will be important when his company begins to advertise in other markets, because facilitating more loans "lowers the relative cost" of advertising.
Prosper chose Minnesota as a test market because "Minnesota didn't have a rate cap issue."
A WebBank spokesman said its policy is not to speak to the news media. Its first-quarter call report said it had $34 million of assets.
Prosper is not the only person-to-person loan facilitator working with WebBank. Lending Club Corp. is setting up a similar arrangement. The Sunnyvale, Calif., company said last month that it was reorganizing its lending procedures to offer promissory notes to its lenders, and that it was no longer accepting loan requests. Lending Club, citing a quiet period while it completes this process, would not discuss the matter.
Edward Woods, a senior analyst for Celent LLC, a Boston financial research arm of Marsh & McLennan Cos., said working with an ILC could appeal to potential Prosper lenders. "If I could lend to somebody else with the same credit score and get 400 more basis points, I'm going to do it."
