I Warned You About "P2P Lending"… and I Was Right

Shah Gilani

I’m following “Disruptors” because I think they’re going to be a huge nexus of wealth creation (and destruction) in the coming years.

They’re causing monumental shifts in everything and changing our lives. In the markets, these Disruptors send huge capital caves into new paradigm businesses… and push big capital waves out of adversely disrupted businesses.

Marketplace lending, or P2P lending, is a perfect example of a Disruptor business.

I've written before about the issues marketplace lenders were going to have and how you'd be better off borrowing from a marketplace lending site than investing in any of them.

I don't want to say "I told you so," but I'm being proved right yet again.

Things aren't getting better for investors in what used to be called "peer-to-peer" lending.

So, if you want to get an online loan, go for it – but don't waste your money betting on any of the sites being a home-run investment.

For now, you should keep your capital away from marketplace lenders.

Here's why…

P2P Lenders Aren't Actually Independent

First of all, peer-to-peer lenders aren't banks.

They're Disruptors precisely because they aren't banks, but act like banks.

But just because marketplace lenders aren't banks doesn't mean they're immune from banking regulations. That's because marketplace lenders have bank "partners."

The disruptive side of P2P lenders is upfront. It's in where borrowers go, which is online. It's in how borrower's creditworthiness is profiled, which is largely based on online access to things like payment histories and social media profiles. And upfront it looks like a borrower is borrowing from an online "peer."

That's upfront stuff. The back end of P2P lending is still about banks.

Disruptive P2P lenders need a bank to operate. And that's becoming a problem.

The Dark Side of "Conduit Banks"

You see, P2P lending sites don't make loans. They are simply an online introduction conduit. They're matching rooms where borrowers and lenders "speed date."

When a lender agrees to fund a borrower's loan request online, the actual loan runs through a bank, usually a very small bank, more often than not located in Utah.

Why Utah? Because Utah doesn't have state usury limits or rate caps like other state-chartered banks have.

Tiny Utah-chartered WebBank is the back-end bank of several marketplace lenders, including LendingClub Corp. (NYSE: LC) and Prosper Funding LLC, two of the largest and best-known P2P lending sites.

WebBank acts as the lending bank to the borrower, where WebBank uses the lending "peer's" capital as collateral. If the borrower doesn't pay, WebBank has the peer's capital and isn't at risk.

But conduit banks are coming under increasing scrutiny – as are lending sites themselves – with regard to cutting regulatory corners on customer information, antiterrorism, and anti-money-laundering regulations.

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Shah Gilani

About the Author

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Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains.Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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