ABA Banking Journal 5/08 - (Page 10) briefing chances of getting a loan, but that’s exactly what the top-featured borrower candidates were doing when we recently visited Zopa.com. Lenders on Zopa designate exactly which borrower they want to assist—almost like donating to charity causes—even though, technically, individual Zopa lenders do not directly lend to individual borrowers. To circumvent the regulatory issues discussed, Zopa uses a model whereby “lenders” invest in insured CDs at credit unions and the availability of those funds allows the institutions to lend to online borrower applicants. How individual “donors,” let’s call them, help individual borrowers is that each time a particular borrower is selected the intermediary lending institution gives back ten basis points of the interest rate they were charging that borrower. For the financial institution, each new borrower designation means a new customer is opening a CD. Thus they are willing to make a small concession on interest on the loan. Although the CD rates that donors receives so far are about as good as can be found (recently 3.75% versus the top Bankrate.com-cited rate of 3.83% on a 1-year $500 CD) the financial institution still makes money, Zopa’s Dolton says. “They’re only giving up 10 basis points” Dolton says, and getting a new customer in return. Yet, tiny deprecations in interest amount to a big difference for the borrower. For one woman widely aided in her attempt to go back to school, he said, “her monthly loan payment was $107 and now it’s $36.” Zopa’s chosen financial institution intermediaries are credit unions and Dolton says, “I don’t see any need for us to change that.” USA FCU, San Diego, is one of six Zopa partners. With $698 million in assets it’s about the typical partner size. Todd Kern, vice-president of marketing, says Zopa helps the credit union to distinguish itself. “Zopa helps to get the word out and to get us to a younger demographic… out there on Facebook, etc.,” he says. He confirmed that someone on Facebook with no prior affiliation with USA FCU can find a way to become a member. Should banks embrace p-to-p? Keith Leggett, senior economist at ABA, says he sees no reason for banks to participate in p-to-p lending sites. “Why would you disintermediate yourself?” Spokespeople for the sites don’t necessarily agree. “Banks need to be honest with themselves,” was the opener from Virgin’s Advani when asked about this. He went on to say: “It’s a trend they want to be part of; it’s still relatively small so they won’t be cannibalizing a big part of their business; and it taps a different kind of customer.” That is, the self-directed, tech-savvy type, often students or those now funding start-up businesses covertly on home-equity loans or credit cards. Banks’ automated underwriting models typically eliminate applicants who have not been in business one to three years, Advani says, proposing that consumers can cut their teeth on Virgin “… and banks can come along when the loan is seasoned and make a subsequent loan.” Virgin has a deal with one national bank to make student loans later this year. Indicating their relative power, Advani won’t name it partly “to retain the right to change the institution if it’s not helping.” Virgin is also in early talks with other banks regarding mortgage and small business loans. Prosper’s founder also says he wants to work with banks, even though he is Chris Larsen, the guy who started ELoan. That was, he admits “a direct competitor” to banks, whereas Prosper is “an infrastructure” in which banks can participate, either directly as lenders or indirectly by establishing micro-lending communities among their customers, charging referral fees, and possibly other charges for supplying pre-approved borrowers to the pool. Netbanker’s Bruene notes, “Within the first year, over 20% of Prosper’s loans were late or defaulted.” Prosper has improved borrower vetting and brought its delinquency rate down to 4.9% currently. Now, Larsen says, “95% of our borrowers are prime, with a FICO of 720 or more.” Virgin and Zopa suggest Prosper is adversely selected by borrowers who can’t get a loan elsewhere. Default rates LETTERS Excessive fees make us all look bad To the Editor: Congratulations on a great commentary in the Journal this month [“Don’t mess with my job,” March]. You hit the nail on the head and I applaud you for taking a stand that may fly in the face of convention and may even lose you a subscription or two. Congratulations to Ann Marie Mehlum, as well [CEO, Summit Bank, Eugene, Ore., quoted in the column]. She started the process of saying out loud what we all have been thinking for many years. Some of our large-bank friends have taken advantage of the consuming public, and the most egregious make the rest of us look bad. Many of us try and tell folks that bankers are good people, but the commentary is difficult to believe when the way is blocked by the actions of the largest institutions in our country preying upon those that can least afford it. “We” continue to charge excessive late fees, over-the-limit fees, annual fees, and then we increase the rate because the customer is paying someone else late! It doesn’t matter if your customer is current; their rate goes up because of a belief that they might be a higher risk. I am all for making a profit, but life as well as banking has to be in balance and the ABA and most of our bankers will have a hard time defending some of “our” actions. William M. Dana Jr., President and CEO Central Bank of Kansas City (Mo.) CORRECTION In last month’s feature, “Tough time for that IPO,” a quotation on page 46 by Great Florida Bank CFO Gary Laurash should have said, “we have $170 million in capital against $1.3 billion in loans.” are between 3% and 3.5% at Virgin and at Zopa U.K. “less than one tenth of 1%”. Zopa U.S. only started operations four months ago so has no track record. Prosper runs an eBay styled online auction process, which is how individual lenders and borrowers strike the interest rate the borrower will pay. BJ 10 MAY 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.aba.com http://www.nxtbook.com/nxtbooks/sb/ababj0308/index.php?startid=4 http://www.nxtbook.com/nxtbooks/sb/ababj0308/index.php?startid=4 http://www.netbanker.com https://www.usafedcu.org/ http://www.ababj.com
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