Marketplace lending surely had its day in the sun in 2014. Peer-to-peer lending, which now goes by the term marketplace lending, took a big step forward last year. We saw the IPO of Lending Club rocket in its first day of trading on December 11, 2014 by first pricing above the range at $15 per share and then touching a high mark of 67% that day. Lending Club has been the leader in this field and its IPO highlighted the importance and the emergence of this new lending alternative. Despite this surge, however, not everyone attended the party in 2014. Noticeably, the SEC still has not finalized its crowdfunding rules, which are an important next step for the marketplace lending industry.
So what exactly is marketplace lending? Put simply, it is an Internet based lending market that is created by connecting borrowers with lenders or investors. There are various companies with different approaches to the concept. In Lending Club’s case, potential borrowers fill out online loan applications. The company (and its bank behind the scenes) then uses online data and technology to evaluate the credit risks, set interest rates and make loans. On the other side of the equation, Investors are offered notes for investment that correspond to portions of the loans and can earn monthly returns on their notes that are backed by borrower payments. As a result, marketplace lending effectively offers secondary market trading for loans.
On the positive side, marketplace lending can be good for borrowers because the lower cost structure of an online platform can be passed along to borrowers in the form of lower interest rates. The use of the Internet and online credit resources can also speed up the credit approval process so that borrowers can get funds faster. In addition, some borrowers may get access to loans that they could not get from traditional banks. In other words, the marketplace could help individuals with lower credit scores or negative credit histories find loans. Thus, despite its critics, marketplace lending can help serve a niche that has historically been underserved by the banking industry.
Marketplace lending, however, at least when it comes to Lending Club and those like it, still has a bank at its core. So some borrowers will still not be able to get loans through this marketplace model. Also, the investors are buying registered securities with interests in the loans made in the marketplace. Lending Club turned to registering their notes with the SEC when