Starting in July with loan availability in Georgia and New Mexico, CircleBackLending intends to fan out across the country in the months ahead.
It helps to know the industry landscape, an advantage CircleBackLending’s CEO and Micheal Solomon and VP Todd Walters have from their days at pioneering peer lender Loanio.
Loanio, the third entrant into the peer lending marketplace behind Prosper and Lending Club, ceased operations in 2011, but a changing marketplace and some persistent business associates convinced Solomon and Walters to give the industry another try.
“I wasn’t sure if I wanted to get back into it but some business associates who have become partners kept calling and asking me to do it,” Solomon recalls.
Five years of financial records and established performance patterns have attracted more sophisticated investors while validating the business model, so a much clearer path faces the duo than there was in 2008.
“The business model was unproven five years ago,” Solomon stated. “There were many uncertainties, including how the loans would perform and whether professional investors would start deploying capital on P2P lending platforms.”
While some aspects have improved Solomon and Walters know they are still in a challenging sector.
“This remains a difficult industry to launch with so many moving parts and wading through them was difficult,” Solomon admitted. “Navigating state and federal regulations was difficult and uncharted territory. People thought it would be simple but the reality was far from it. At least today there is a longer track record of strong loan performance and fast-growing companies in the space,” said Solomon, a lawyer by trade.
The clearer model and verified data have attracted more conservative investors and larger pools of money. This heralds a 180-degree shift from the Loanio days.
“Back then finding investors was a challenge. Now we have to pursue loans.” Solomon said.
Institutional investors can bring a different degree of sophistication and they often have different characteristics than the comparative Moms and Pops that made up a larger percentage of the investor pool the first time around. Did Walters and Solomon have to change their customer service approach in any way?
“We didn’t have to change our approach on the borrower side of our business, but working exclusively with institutional investors and high-net-worth individuals on the lending side will require a different level of service,” Solomon offered.
Some loans that originated as P2P’s are being repackaged and sold as different investment products, a situation not unlike the climate before the crash where toxic mortgages were lumped together and sold to, in some cases, unsuspecting investors. Is there any concern of a similar occurrence happening with peer loans?
Todd Walters sees little reason for concern, pointing out that the loans being issued at CircleBack are being made to high-quality borrowers who provide evidence of their employment and income, practices that were largely absent during the subprime lending days.
“There is risk in any investment, and third parties will inevitably find ways to increase the risk of P2P loans, by using excessive leverage for example,” Walters said. “The key difference is that the underlying assets here are being underwritten in a much more conservative and transparent manner than those sub-prime mortgages.”
Given the shift from individuals to institutions, is the term peer lending a misnomer? “The industry’s loan capital supply is shifting toward professional investors more and more each day,” Solomon said. “I would not say that “peer-to-peer” is a misnomer, but since our platform is only allowing accredited investors to participate, we tend to describe our particular model as “investor-to-consumer” or “investor-to-peer.”