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February 24, 2010

People Capital Launches Peer Lending Platform for Qualified Education Loans
    by Robert Kropp

Following an SEC clarification of peer lending products as securities, People Capital hopes that social investors will use its lending platform to execute their missions. -- Last month, spoke with Tom Shelton, CEO and founder of People Capital, about the company’s beta launch of a peer lending student loan platform. Peer-to-peer lending can be viewed as a form of microfinance, an equation from which the intermediary of a traditional financial institution is removed. By providing direct loans in such socially beneficial areas as higher education, social investors can realize their community investing mission.

Shelton told, “We’re part of the second entrance of companies into the peer-to-peer lending market. The first wave took a lot of arrows in the back. They taught us a lot about becoming a legally compliant platform from a securities perspective and a consumer finance perspective.”

Some of the problems encountered by early entrants into the peer lending field included a 2008 cease-and-desist order issued by the Securities and Exchange Commission (SEC) against Prosper, charging the company with violations of the Securities Act. The SEC determined that since peer lending was marketed as an investment opportunity, such a loan amounted to a security, and as such fell under the Commission’s regulatory mandate.

Prosper has since returned to the peer lending marketplace, and currently reports having funded more than $190 million in loans. In fact Prosper and People Capital have formed a partnership, in which customers who come to Prosper seeking student loans will be sent to People Capital.

Another concern, of course, is the potential for default. In fact, in an article posted last month on The Big Money, Mark Gimein estimated that “close to 36% of the loans made (by Prosper) before Nov. 27, 2007…have ended in default.”

On the other hand, a recent academic report analyzed the ability of lenders to infer the creditworthiness of borrowers in a peer-to-peer platform. Finding that lenders can do so effectively, the report concludes that "peer-to-peer lending can indeed complement existing lending models and improve access to credit, particularly for small individual borrowers."

Shelton told, “What we’re doing is considered a security, and has to be treated as such. Our current legal structure only allows for lending from accredited investors. They can be individuals or institutions. Individuals need to have sufficient assets to be accredited.”

People Capital developed a proprietary credit risk measure called the Human Capital Score, which calculates the future income potential of loan recipients by means of a set of variables.

Shelton said, “An investor can come to our site and lend to individuals based on over 35 different criteria, such as where they went to school, what their major is, and their credit information.”

He continued, “What we’re trying to do in our discussions with the socially responsible investing (SRI) market is to get interest from institutions that want to create funds with specific purposes, and then offer them through their channels.”

“We built this platform with the SRI market in mind from the beginning,” Shelton added. “We believe that such investors can execute their mission, get decent returns, and work within a legal framework that fits their needs.”

One month later, reconnected with People Capital to learn about the success thus far of its beta launch, speaking with Al Alper, the company’s COO.

“The Human Capital score, as a metric for individuals to make better decisions about universities, has received some good press and driven traffic to the platform,” Alper said. “As a result, we’ve seen about half million dollars in loan volume.”

Asked to define loan volume more precisely, Alper said that the half million referred to requested loan volume.

“We’ve transacted about $100,000 in loans thus far,” Alper said.

At present, Alper said, most of the lenders on the site have been high net worth individuals.

“We’re working on bringing institutional capital to the market,” Alper said. “Clearly, there’s some reticence to new models such as ours when it comes to institutional dollars. We believe that as the market plays out, it will trigger more institutional dollars coming into the space.”

According to Alper, investors can tailor their loans to their own risk appetites. “Individuals can be philanthropic, or profit-centered,” he said. Thus far, much of the activity on the People Capital platform has been driven by philanthropy.

“The way the platform works, people can bid at no interest rate, or they can bid at eight percent, if they choose,” Alper said. “It’s a flexible platform, allowing investors to meet their particular risk-reward mandates.”

Looking to the future, Alper said, “Licensing out the Human Capital score to other organizations is certainly part of our long-range business plan.”

“We’ve added a nonprofit vehicle to facilitate scholarships and loan-loss guarantee funds to further expand the philanthropic aspect,” Alper continued. “As the foundation gains prominence, the opportunity to make loans with a reduced risk of loss should grow.”

Alper said that the peer lending market has gained a stable foundation since the SEC issued its regulatory findings.

“I believe that the real successes in the future will be found in the niche markets operating in more secure asset classes, such as qualified education loans,” he said.

“Peer lending offers an opportunity for liquidity and capital in spite of market conditions, because peer lending platforms offer transparency,” Alper concluded.

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