The P2P lending minefield

Social lending has been in the news a lot in the past few months. Canada's first P2P lending community launched in February, and was promptly shut down pending resolution of some regulatory issues. As of today, the IOU Central platform is still "operating with limited functionality".

This week has seen some more interesting news on the P2P lending front. On Monday, Lending Club announced that they would suspend the ability to invest using their site, while keeping the borrowing functionality intact. Yesterday, I received an e-mail from CommunityLend, stating that they are getting close to a launch, and are asking for input on forming "borrower groups", presumably to assess the demand for loans so they can attract sufficient investors when they launch.

I imagine that, given the issues that have hit IOU Central, CommunityLend is being extra cautious, trying to avoid any false starts. This seems to be a prudent approach to take, particularly in such a new and untested (at least in Canada) industry. I'll be keeping an eye on this site; I have a feeling that when they open their doors, things will get interesting.

Here's the text of CommunityLend's e-mail:

Hello and Good-day from CommunityLend

If you are new to the CommunityLend mailing list, welcome to the family and thank you! Your support means everything to us. If you have been around for a while, you will remember that about four months ago we sent out an email with a few major announcements, including our funding and expanded team. We have kept relatively quiet over the past ten months while we have been consulting with the Canadian regulators. At the beginning of April we decided it was time to begin the ramp up to our launch.

Today we want let you all know that our site has received a major overhaul. The new look and feel is based on our launch design and we would love to hear what everyone thinks!

As you may have guessed we are now getting close to launching our service. In the next few months we will be regularly posting on our newly launched blog and making important announcements in our press release section. Our most recent announcement is on the formation of our Board of Advisers. We are very excited to have so much active support from such a fantastic group of people.

We would also like to draw your attention to our expanded management team, which is constantly growing as we move closer to full operations.

Finally, we would like to request that anyone who is interested in setting up a borrower community on CommunityLend contact Dave Coleman, our Community Advocate. Communities can be a great way to connect with people who share similar interests and help each other out financially. Examples are ethnic groups, interest groups, or even industry groups that want to use CommunityLend as a way to help finance their clients; the list goes on. If anyone is interested in starting a community, please do not hesitate to contact us.

Please note however that at this time, we are looking for borrower groups only. We will hold off on the creation of lender groups until our regulatory applications are approved and we are closer to launch.

Once again thank you for your interest in CommunityLend. Your help and support is invaluable!

-The CommunityLend Team

More on P2P lending

I'm very interested in the recent developments in Canadian P2P lending. I haven't been involved in these new projects, beyond signing up for e-mail updates at CommunityLend, but I've kept an eye out for news.

Today in the RedFlagDeals.com forums, I found a quoted e-mail from Phil Marleau, the president and CEO of IOU Central:

Dear IOU Central user,

First and foremost I would like to thank you for being a pioneer in a brand new idea that one day may revolutionize the way Canadians do banking. Without you, IOU Central would not be possible. Secondly, I would like to apologize for any inconvenience the recent turn of events may have caused you.

Last Thursday, the Autorité des Marchés Financiers (AMF) requested that all new activity on our website be stopped. We of course complied immediately and stopped all lending and borrowing activities. IOU Central received legal advice from a major Canadian law firm prior to its launch with respect to the Canadian regulatory environment; however, IOU Central is acting in a very new area. We are the first in Canada to offer peer-to-peer lending, although similar models are operating in the US and the UK. We are committed to working with all the relevant regulatory bodies in order to continue to offer our service to borrowers and lenders in full compliance with applicable regulations. We have initiated discussions with the AMF in order to resolve the matter as soon as possible. In the meantime, our site continues to operate with limited functionality.

Thank you for your patience and understanding. We will update you on any new developments.

Best regards,
Phil Marleau
CEO & President

So it looks like they have received a "cease and desist" order, after launching their service without having fulfilled all the regulatory requirements. I'll be interested to see whether this kills their venture, or they're able to satisfy the regulators and get back up and running.

Update

The AMF has released a communication (PDF) regarding the action against IOU Central:

IOU Central Inc.
ORDERED TO CEASE TRADING AND ACTING AS SECURITIES ADVISER

Montréal, March 3, 2008 – At the request of the Autorité des marchés financiers (AMF), the Bureau de décision et de révision en valeurs mobilières (BDRVM) issued an order on February 27, 2008 against IOU Central Inc. ("IOU") to cease any activity, directly, indirectly or by Internet, in respect of a transaction in a form of investment governed by the Securities Act (the "Act"), including any activity as a securities dealer. The BDRVM also ordered Philippe Marleau and all directors, officers, employees, representatives and mandataries of IOU to cease any activity in respect of a transaction in securities in a form of investment governed by the Act for and on behalf of IOU, including any activity as a securities dealer.

IOU's website (www.ioucentral.ca) is an internet-based market that enables people to borrow money directly from and lend money directly to other people. According to the AMF, these activities violate the Act.

In its decision, the BDRVM expressed concern about the following AMF allegations in particular:

• IOU, Philippe Marleau and the other officers assisted borrowers in distributing debt securities to lenders without a prospectus from the AMF.


• IOU, Philippe Marleau and the other officers acted as securities dealers via a website without being registered with the AMF.


• The services offered through IOU's website were market activities governed by Regulation 21-101 respecting Marketplace Operation, but IOU was not authorized to carry on such market activities.

For the protection of investors, the AMF stressed that it was imperative that the BDRVM issue this decision without a prior hearing since IOU continued to operate its website.
The Autorité des marchés financiers (AMF) is the regulatory and oversight body for Québec’s financial sector.

– 30 –

Information:
Media only: Frédéric Alberro 514-940-2176
Information Centre
Québec City: 418-525-0337 Montréal: 514-395-0337
Toll-free: 1-877-525-0337
www.lautorite.qc.ca

So it looks like the issue is an alleged contravention of the Securities Act.

A bump in the social lending road?

A few weeks ago, Canada's first person-to-person lending platform community opened its doors with the launch of IOU Central. At the time, there was some discussion about which regulatory bodies would oversee this industry in Canada. The position taken by IOU Central was that there were essentially no watchdogs, and they based their operation on the Prosper model.

Well, it seems that Canadian P2P lending may have some watchdogs after all. According to IOU Central's website, they are currently operating with "limited functionality" while they "resolve a regulatory matter". During this downtime, users can not post new loans, nor can they place bids on loans. The only activity is the repayment and servicing of funded loans under the borrower and lender agreements.

This is an interesting turn of events, as IOU Central seemed to come out of nowhere, while the CommunityLend project has been working on regulatory and technical requirements for ages. The difference, of course, is that CommunityLend seems to be aiming to have its ducks in a row before launch, rather than going off half-cocked. It's possible that IOU Central's "regulatory matter" is actually very minor, and they'll be up and running again soon, but it looks to me as if they rushed to market, and are now paying the price for their lack of preparation.

Person-To-Person Lending: not just for Americans anymore...

I've read a fair bit online about Prosper, the popular American person-to-person lending community, and I've been wondering when we would see this sort of thing in Canada. For months, I've been checking in on the CommunityLend project, which looks promising, but has yet to provide any concrete launch plans.

This week, Canada got its first person-to-person lending platform, with the launch of IOU Central. Like Prosper, IOU Central allows users to lend or borrow funds. Users can request a loan of $1,000-$25,000, or bid on loans in increments of $25-$25,000. As I understand it, 40 users could bid $50 each to fund a $2,000 loan, or a single user could fund the entire loan. The ability to diversify across multiple loans provides a nice protection against default.

An interesting point is that, although IOU Central is not insured by CDIC, they keep member deposits at a CDIC-insured bank, effectively providing "CDIC pass through insurance". This is similar to the indirect FDIC insurance enjoyed by PayPal members. My first thought on reading this was, "Holy smoke, they insure the loans!" However, I soon realized that it's only your unlent deposits that are insured; once you've funded a loan, you're at the mercy of the borrower.

This service is brand new, so I'm a long way from actually trying it out. However, I'll be very interested to see what kind of reaction this gets, and what happens when CommunityLend finally comes on the scene.