The Securities and Exchange Commission is now greenlighting Prosper to facilitate peer-to-peer lending in 14 states with more on the way, borrowing nearly nationwide. Prosper is now the first and thus only Internet auction-based P2P loans platform to have its registration statement declared effective by the SEC, which is evidently good news for other players in the P2P lending industry, such as Lending Club.

SEC’s approval of Prosper’s secondary marketplace, which enables people to loan money directly to other individual and institutional investors, comes a couple of months after the startup had already reignited its lending platform in the State of California (update: and apparently had to suspend it again a few days after).

Chris Larsen, CEO and co-founder of Prosper, is happy the dry period is over:

“With the financial system in crisis, P2P lending – Americans investing in fellow Americans and small businesses – is needed now more than ever. It has been extremely frustrating to be on the sidelines in the teeth of a credit crunch.”

Starting today, Prosper is available to lenders in California, Colorado, Delaware, Georgia, Illinois, Minnesota, Montana, Nevada, New York, South Carolina, South Dakota, Utah, Wisconsin, and Wyoming. Borrowing is permitted in the District of Columbia and all states except Iowa, Kansas, Maine, and North Dakota.

Prosper has raised approx. $40 million in capital to date from Accel Partners, DAG Ventures, Fidelity Ventures and Benchmark Capital, among other investors. The company was the first to introduce the concept of people-to-people lending in the U.S. when it launched in 2006. From the time the startup officially launched up until the time it entered an SEC registration quiet period in October 2008, Prosper claims to have grown to more than 800,000 members, facilitating approximately $180 million in personal loans.

Prosper has now enhanced its auction model to include a so-called hard bid floor for each listing, which helps lenders appropriately price for risk while investing online. The bid floor for each listing is calculated by adding the national average certificate of deposit rate that matches the term of the borrower loan to the minimum estimated loss rate assigned to each listing. In addition, Prosper has lowered its minimum bid requirement to $25 (previously $50), which should make it easier for lenders to diversify, particularly smaller ones.

More details are available on the Prosper blog.

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But now Prosper is back despite the fact that the SEC hasn’t yet approved its operations, and while they have respected the requested silence up during the six-month hiatus, they haven’t exactly stalled development of the service. The company relaunched its lending services yesterday for the State of California (borrowing can be done throughout the U.S.), and is hoping to take the whole thing nationwide soon.

There are new features, too. Prosper announced its Open Market initiative, which will allow other financial institutions (e.g. auto lenders, small business lenders and community development lenders) to place their already funded loans the Prosper website for auction. The company will vet lenders and require three payments to have already been made on any loan up for sale.

Prosper has raised $40 million in capital to date from Accel Partners and Benchmark Capital, among others. It’s up against well-funded competitors such as Zopa and Lending Club.

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The company, which started out as a Facebook application for social money lending, hasn’t had it easy so far. In April 2008, it put a hold on lending activities because of regulatory issues, and ultimately filed for SEC registration during the summer of that year. Then the economy collapsed and Lending Club along with other P2P lenders were heavily affected. The SEC suspended loan activities one of Lending Club’s main competitors, Prosper, at the end of last year, citing obvious reasons that these companies should be regulated by the SEC as a securities seller. Another P2P lender, Zopa, hightailed it out of the U.S. market at about the same time.

With some of its main competitors out of the battlefield (but others remaining), the company will no doubt use the new capital to push for dominance in the space. Lending Club says it’s growing quickly, doubling its user base over the past 5 months and handing out returns to users of over 9% net. It also announced a new chief marketing officer, Pamela Kramer, who joins from Etrade, where she held the same position.

If the company manages to weather the storm without too much damage, it will be very interesting to see how social lending evolves in the future – now that banks and other ways of loaning money have lost a lot of credibility across the board – and how vital the role of Lending Club in that story will be.

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Lending Club previously had to do the same thing and suspend new lending last April . (The S.E.C just gave it the green light to start lending again on Tuesday). Zopa shut down it’s P2P lending site in the U.S. last week.

Even before the increased regulatory scrutiny, P2P lending took a massive hit along with the rest of the financial industry. As Brad Stone points out in an excellent piece in the NYT:

Monthly loan volumes at the company have been declining since the credit crisis worsened this spring. Prosper, which is unprofitable after raising $40 million in venture capital, now faces the damaging possibility that lenders may take their money off the site instead of waiting for the S.E.C. to allow lending to resume. That could take several months.

You can see on Lending Stats that Prosper’’s membership growth and the number of active lenders and borrowers took a dive starting last April. And delinquencies for loans more than 18 months old are trending at higher than 30 percent. That is because a large portion of Prosper’s loans are in the sub-prime category. People who couldn’t borrow from a bank, borrowed from their neighbors on Prosper instead.

Now they are temporarily shut down.

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Lending Club, the P2P money lending site, has filed registration forms with the SEC. Pending their approval, the site should be able to relaunch its lending service, which has been on hiatus since April (while the company didn’t provide an explanation for the shutdown at the time, we speculated that they lacked the proper licenses).

From the release:

The registration statement seeks to register the offer and sale of up to $600,000,000 in Member Payment Dependent Notes to be issued by Lending Club in a continuous offering following the effective date of the registration statement. The Notes will be issued in series with each series of Notes corresponding to a single consumer loan to a borrower member.

Lending Club originally launched as a Facebook app that allows users to lend money between themselves. But because the company acts as a middleman for transactions rather than connecting users directly, it requires a broker-deal license from the SEC. For time being Lending Club will remain in hibernation, but the company hopes to resume business as soon as the forms are approved.

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If you are having trouble paying for college, maybe you can hit up your social network for a loan. That’s the idea behind GreenNote, another peer-to-peer lending startup that is launching this week. (The site is still going through load testing, but should be up fully by Wednesday). Prosper, Zopa, and Lending Club (which is under regulatory scrutiny) already offer general P2P loans, but GreenNote is more like Fynanz or China’s QiFang, in that it is focussed only on student loans.

These tend to have lower default rates and there is a rising need for them. The funding gap between the average four-year cost of going to a state college and available federal loans is at least $22,000, according to the company. For private universities, that gap can be more than $100,000. P2P lending startups like GreenNote see that gap as a huge opportunity. In aggregate, there was a $113 billion funding gap in 2007, $95 billion of which was paid for by personal and family funds.

But GreenNote is not about matching high-risk borrowers with lenders who want a higher return. It is about tapping into the altruism of family and friends who want to chip in to help finance the college education of a student they already know. CEO Akash Agarwal says:

This is really getting your social network to help you—asking your social network to step up, and not asking for a hand-out.

The loans are designed to mimic a federal Stafford loan—the interest rate at launch is 6.8 percent. The rate is fixed, payments are deferred for up to five years, and then students have 10 years to pay back the loan. No co-signers are needed, and GreenNote loans are open to non-U.S. citizens.

Lenders can pitch in as little as $100. In that sense, it takes more of a micro-finance approach. GreenNote keeps track of who owes what to whom, takes care of the paperwork, collects the funds, and then distributes the payments after the student graduates and starts paying back the loan. GreenNote takes a 2 percent fee up front from the student out of the principle of the loan, and another 1 percent from the lenders out of the interest. (Fynanz, in contrast, only takes a 1 percent fee).

GreenNote raised $4.2 million in a series A round last October from Menlo Ventures and Glenbrook Partners.

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Lending Club, a P2P lending service that started off as a Facebook app, has temporarily stopped accepting new loans and lenders.

According to a brief “quiet period” note on its website:

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes.

While the company will not talk to media “until the registration process is completed,” we suspect that Lending Club is looking to obtain a broker-dealer license from the SEC that would legitimize its operations.

Since Lending Club both loans and borrows money from users, instead of connecting them directly, it’s not a pure P2P service. While the legality of its lending practices is not in question, its borrowing practices could be interpreted as the sale of securities, which requires a license Lending Club doesn’t appear to have.

This suspicion has been reinforced by Veronica McGregor, an attorney with the law firm Perkins Coie. She says that “it looks like they are getting themselves a license to buy and sell securities.”

These are issues that other P2P lending sites – such as Prosper, Virgin Money, and Zopa – will have to face if they haven’t already.

Center Networks has more thoughts on the situation here and here.

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Prosper is about to get a lot more competition. After more than a year of waiting, UK-based Zopa got the go-ahead from regulators to launch its U.S. Website last week. Zopa, which doesn’t allow sub-prime loans at all, has a 0.1% default rate, whereas Prosper has a 3 percent default rate.

And Lending Club, which started as a Facebook-only application, just got clearance today to operate nationwide. (It had been awaiting approval from half a dozen states, including big ones like California, Michigan, Illinois, and Pennsylvania). Lending Club launched six months ago on Facebook, and opened up its own Website three months ago. In that time, its members have issued 489 loans worth $3.5 million. Of that amount, only $16,000 worth are between 16 and 30 days late on payments (see stats here). It also does not allow sub-prime loans.

Lending Club’s loan portfolio is too small and its loans have been out too short a time to really know what its average default rate will be. But if it can match its larger competitors, it should do fine. Social lending is here to stay.

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Zopa’s peer to peer lending service differs from U.S. rivals by working with credit unions to offer person-to-person loans instead of a loans coming directly from lenders on the service like Prosper and Lending Club (works through Facebook). GlobalFunder.com is a yet-to-launch competitor. With Zopa, lenders will place their money in Zopa branded CDs that are then loaned out online. Borrowers apply for loans through their online community by posting their case for the loan and filling out relevant details about their credit risk. Interest rates on five year loans can range from 8.75% to 16.99%, depending on their credit risk.

It’s worth noting that Zopa’s investor, Benchmark also invested in Prosper. The lending market is anticipated to be very large. According to the research firm Online Banking Report, around $100 million in new P2P loans will be issued this year, mostly by Prosper, with new loans growing to as much as $1 billion in 2010 and $9 billion in 2017. Prosper already registered an S-1 with the SEC and reported $96.4 million in loans.

Adding further details to the launch, Allen Stern received an email outlining some differences between the U.S. and U.K. (which TCUK covered) versions. The key differences listed are:

• No risk for investors.
  Your funds will be federally insured. No more worrying about whether your borrowers will pay your loan back.
• Pick who you want to help.
  Investors will choose exactly who they want to help.
• Set your rate.
  Investors will choose how much they want to earn, up to a ceiling.
• No waiting.
  Borrowers will get their loans immediately upon approval.
• Lower your monthly payment.
  Borrowers can actually reduce their loan payments after they’ve borrowed. They’ll do that using rich profiles…

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Lending Club

The milestone comes just short of 3 months since the the site hit the $100,000 mark, and 3 1/2 months since going live as an original Facebook Platform partner.

Lending Club will also announce today that it is expanding beyond Facebook and will now offer similar ways to connect borrowers and lenders through thousands of alumni associations and professional organizations.

The new site includes tools for building diversified loan portfolios composed of pieces of 20 to 30 individual loans, hosts a forum for financial experts to share their knowledge with the Lending Club community, and “Better Rates Together,” a blog community that features expert advice on P2P lending and personal finance.

Lending Club recently secured $10.26 million in Series A financing led by Canaan Partners and Norwest Venture Partners.

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Lending Club

Lending Club was an original Facebook Platform/ F8 partner having launched with F8 on May 24. The company closed its first loan on June 6, and has since closed 27 more loans for a total of $101,250. An additional $212,650 in loans will close in the next 12 days. More than $180,000 is currently available from 271 lenders with around 10-15 new lenders transferring money to Lending Club every day.

The social networking angle of Facebook allows Lending Club to leverage trust by enabling lenders to find borrowers within shared networks. Lending Club uses technology to pair the two parties based on shared connections without giving lenders direct access to the borrowers Facebook profile.

P2P lending is a rapidly growing market. Lending Club faces stiff competition from companies such as Zopa, CircleLending and Prosper. Although it may not be the market leader in terms of volume, Lending Club’s growing success demonstrates the potential of Facebook as a sales and finance platform.

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