New service turns investors into lenders

Toronto-based CommunityLend Inc. has launched an online lending service that allows accredited investors to make loans to consumers for profit. And although it offers no brokerage fee to advisors, CommunityLend pitches its services to investors as an alternative investment, comparing the return on consumer credit favourably vs returns on traditional fixed-income.

“This is a new investment class to the average — but reasonably sophisticated — investor,” says Colin Henderson, CommunityLend’s chief technology officer and co-founder. “This is consumer credit, which has a higher rate of return, even net of default rates, that can be included into the mix of [investors’] portfolios.”

So-called “peer-to-peer,” or P2P, lending competes with banks and credit card companies for small to medium-sized loans. CommunityLend, which is privately held, spent about two years with provincial regulators and has attained exempt-market dealer status with the Ontario Securities Commission. Now that CommunityLend is in business, it is matching Canadian lenders and borrowers online — something akin to eBay for loans.

CommunityLend, which is also listed as a portfolio manager in Ontario, sorts borrowers into groups, which it rates with its own lending score; sets suggested interest rates; and then lets lenders compete for the loans.

Although CommunityLend can’t promise a rate of return, it aims to provide predictable rates of returns for lenders over time, Henderson says, so it has developed a set of consistent risk-management standards.

Borrowers identify themselves only to CommunityLend, and they need to qualify for the online service. Additionally, says Henderson, the borrowers’ debt-servicing ratios, incomes and lifestyles are determined so lenders can make a decision about the sort of profile they’re funding.

Instead of financing charges that can be as high as 30% annually with credit card companies, borrowers have access to loans with rates as low as 6%, depending their credit profiles and the bidding process.

Bobbie Britting, research director for consumer lending with TowerGroup Inc., in Needham, Mass., who covers the P2P lending industry, says investors/lenders are getting good returns on their money. That’s based on similar U.S. and British services.

Redwood City, Calif.-based Lending Club LLC, one of the larger P2P loan services in the U.S., says the average borrower pays about 13.5%, and the lender earns about 9.9% after fees and defaults.

“Of course, there’s a huge risk differential there,” Britting says. “If you have your money in a savings account, you’re not going to lose it. In theory, you could lose all the money you put in your [P2P] lending investment.”

Britting has done only initial coverage on CommunityLend, she says, but it appears the firm has learned from existing services in the U.S. and Britain. It is, however, impossible for her to know how well the service could do north of the border. She cites the recent banking crisis in the U.S.: “We’ve had such trouble with the [U.S.] banks. I don’t know if there’s that level of animosity with the banks in Canada.”

Britting also notes that based on the suitability questions and the rates CommunityLend is offering, the firm is approaching the prime lending market in Canada — as are similar firms in the U.S.

“We’re not talking about subprime borrowers here,” she says.

The P2P lending industry is nascent, and worth considerably less than US$1 billion, notes Britting. But industry players in the U.S. are experiencing rapid, “hockey stick-like” growth, exceeding forecasts.

San Francisco-based Prosper Marketplace Inc., which launched in 2006, has a base of about US$400 million in active loans. It grew its monthly originations to US$2.5 million at the end of October 2009 from less than US$1 million in August, according to Britting’s latest figures.

Lending Club, which joined the industry in 2007, saw its monthly lending originations grow to US$5.5 million at the end of October 2009 from US$2.5 in January of the same year.

“I believe, at the end of the year, that put [Lending Club] at around US$80 million,” says Britting, who will publish a new report on the industry shortly. “And it was forecasting higher than expected growth for the beginning of 2010.”

Gartner Inc., another U.S. consultancy to the financial services industry, says that the P2P lending market could reach US$5 billion by 2013. Britting, however, wasn’t ready to forecast her own numbers: “I suppose you can gauge the growth of the industry by the growth of [online] social media, how rapidly that’s growing and people’s acceptance of it. It’s becoming more mainstream.”

@page_break@Wells Fargo & Co. , the third-largest bank in the U.S. and a leader in online services, according to Britting, has just 4,000 followers on Facebook, for instance. Lending Club, tiny by any other comparison, has more than 1,000 already.

“The P2P lenders,” she says, “are just doing a better job of encouraging friends through [online] social media to use their service.”

Given CommunityLend’s market, it’s obvious that the company has a registered Facebook account and it also sends out own “tweets” via Twitter, but it’s a private service, notes Henderson. Although lenders may know why they’re providing a loan to a client, they won’t know who the client is — nor does the borrower know the financier.

CommunityLend’s fees include a cost for loan servicing, including the hiring of a collection agency for wayward borrowers.

So far, besides institutions such as banks and money managers, only private “accredited inves-tors” can offer loans through CommunityLend. That term includes individuals or spouses that own realizable assets of more than $1 million, net of all debts. Or, for example, individuals with net income before taxes of more than $200,000 in each of the two most recent calendar years. Other descriptors are available on CommunityLend’s website.

Thus far, no major retail fund monies are invested through CommunityLend but, Henderson says, that could change. Stone & Co. Ltd.’ s Flagship Stock Fund Canada made a $1-million convertible debenture investment in CommunityLend Holding Co., the business unit that owns the website service. Other investors include private and institutional placements from Canada, the U.S. and Britain.

CommunityLend’s board of directors includes Henderson; co-founder Michael Garrity; Colin Evans, the founder and managing partner of San Francisco-based Sandwith Ventures LLC; and Jim Jones, former CEO of GMAC Residential Capital LLC. IE