“Our best users have credit scores under 650,” said Skylar Woodward, the CEO of Puddle and a co-founder of the microfinance group Kiva. “People who the current system says are untrustworthy or high-risk actually are repaying at over 95 percent.”
While r/borrow and even these full-fledged companies remain on the fringes of consumer lending, the notion of directly matching individual borrowers and lenders could transform the financial industry in time. Today, the intermediary between borrowers and lenders is most often a bank, and banks, in exchange for providing this service, take a cut amounting to more than $1.5 trillion per year. So, one of the promises of peer-to-peer lending, on a larger scale, is that it could greatly reduce banks’ roles as intermediaries, and pass on the savings to borrowers and lenders alike.
While banks still remain the public’s (and the government’s) favored lenders, these new peer-to-peer companies and initiatives, for the most part, have the implicit or explicit approval of regulators. According to Lauren Saunders, the associate director of the National Consumer Law Center, the Federal Trade Commission has general authority to regulate unfair or deceptive lending practices, and for lenders making more than 25 loans in a calendar year, so does the Consumer Financial Protection Bureau, which is in the process of developing a new set of regulations requiring that payday lenders, among other things, evaluate borrowers’ ability to repay loans. Anyone making more than 25 loans a year is also required to disclose the loans’ interest rates, according to the federal Truth In Lending Act.
In 2008, Prosper and Lending Club both briefly shut down (Prosper did so because of a government cease-and-desist order) in order to register with the Securities and Exchange Commission, but the legality of an informal lending network like r/borrow has never been tested. “If this is a large and thriving marketplace, at some point it seems as though it would run afoul of at least state, if not federal, regulations,” said Leonard, formerly of the Center for Responsible Lending. “There’s a whole set of laws and regulations around the collecting of debts, and what you’re allowed to do, what you’re not allowed to do, how you’re allowed to contact people.” For example, while the r/borrow rules page tells lenders to abide by state-level interest-rate caps, this rule is not stringently enforced.
Still, the loan was funded
It’s not clear what this means for the future of r/borrow. But emergency lending, even if it were perfected, would remain the symptom of a bigger problem. “Some of the challenges that people are facing involve looking to credit when credit is not really the answer,” Valenti, of the Center for American Progress, said. In addition to holes in the social safety net and health-care system, “some of it can be traced to the minimum wage not being sufficient and not keeping up with costs for folks,” he said. So, for the time being, despite high interest rates and an absence of official protections, a small set of borrowers see an ad-hoc Reddit network as their best option for emergency cash. “It’s interesting, and a little bit troubling, that people are heading in this direction,” Valenti said.
In February, one user asked for a $20 no-interest loan to pay for a pizza that would feed him for a few busy days
r/borrow isn’t the only option that has sprung up as an alternative to the usual ways of getting money on short notice. LendingClub and Prosper are two bigger-name startups that link individual borrowers with individual lenders, though not as directly as on r/borrow (and they take a cut of the money exchanged). There’s also Puddle, a platform in which groups of users pay into a fund that they can borrow from when they need a cash boost, and Oportun, which is accessible from inside Latino supermarkets in California, Texas, and Illinois, and offers payday-style loans, but with longer repayment terms. And the city of San Francisco runs Payday Plus SF, which partners with local credit unions to provide short-term credit at lower interest rates than many payday loans.