The new wave of Peer to Peer Lending providers allow ordinary citizens to lend and borrow money with one another, online, in a convenient, secure and legally compliant manner.  But is there a way to leverage this new financial service by combining it with a highly networked (and highly internet savvy) political support structure?

We present 2 potential synergistic use cases for “Peer to Peer Campaign Finance” - plus a handy dandy flowchart outlining one example case.

Political campaigns, by ubiquitous necessity, collect the majority of their contributions via credit card.  A contribution made via credit card is nothing but a “loan” made to the contributor by the issuer of the credit card, with the proceeds of the loan then being transferred to the campaign (or, if you’re charging lunch, to a restaurant).  This type of loan arrangement does not appear to constitute a violation of the federal prohibition on making a contribution in the name of another person or allowing one’s name to be used to effect such a contribution - everybody does it, regardless of political affiliation, and has done so for years, and will continue to do so.

But, as often occurs, new technologies and new paradigms present… new opportunities.  The advent of online Peer to Peer Lending makes it possible for individuals (or groups of individuals) to make similar types of loans to one another - without the mediation of a bank or credit card issuer.  Given that the interest rates and payment terms on each loan can be set by the individuals involved, rates and terms are often more favorable than those offered by traditional credit providers, and, additionally, affordable credit can be directly extended to those who might not otherwise have access to it at the time.

• Case 1:   Peer to Peer Lending as a convenient, fixed-rate, 36-month alternative to Credit Card contributions.
  • Potential contributors sign up with a Peer to Peer Lending marketplace and request a loan.
  • Individuals (including, potentially, fellow supporters of the borrower’s cause of choice) bid on the loan request.
  • A loan is issued to the borrower at an interest rate set by the individual lenders who have bid on the loan.
  • The borrower is then able to use the proceeds of their loan to make their chosen contribution.
  • Borrowers repay the loan over a fixed schedule (normally 36 months) with a fixed monthly payment at an interest rate which was set by the individuals who bid on the loan, and which is not subject to change.

• Case 2:  Peer to Peer Lending as a convenient means for indirect support of a particular cause.
  • Individuals sign up with a Peer to Peer Lending marketplace provider to lend.
  • Loan requests by borrowers who support a common cause with the lender are identified.
  • Individual lenders bid on the loan requests of borrowers with whom they identify.
  • A loan is issued to the borrower from the funds of the lender (or a group of lenders).
  • The borrower is then able to use the proceeds of their loan to make their contribution.
  • The individual lenders are repaid over 36 months according to the terms of the loan.

Flowchart example - one potential P2P Campaign Finance implementation, “The Obama Loan“:

It is important to note that while there are strict federal guidelines about, for example, how much one individual can contribute to a particular political campaign cause in a particular year (for example, during a general presidential election, one may only directly contribute $2300), there are NO limitations on how much one can lend out to other individuals via a Peer to Peer Lending platform.

Think about that for just a minute. Happy 2008 Election!

In a major development in the P2P Lending space, one that has implications for the entire P2P Lending model as it currently exists, it appears that LendingClub.com has partially ceased operations. A notification is up on their site that they are no longer accepting new P2P lender registrations and that no further loans may be made by P2P lenders, though they do apparently plan to continue issuing loans to new borrowers, however, the loans will not, strictly, be “peer-to-peer“.

The stated reason for the shut-down is that they have begun a process of registering the loans as securities (presumably with the SEC) and so must enter a “quiet period”. As well, LendingClub claims that existing loans will continue to be serviced and that lenders will still receive payments. Curiously, they also say that borrowers may still register and seek loans though those loans will be funded and owned by LendingClub.

There has been a large amount of speculation recently in many corners that the P2P Lending models might be subject to some legal uncertainty regarding whether the loans should be classified as securities (and would therefore need to be registered with the SEC). The speculation has primarily been concerned with who, in fact, owns the loans (notes), and how exactly that ownership (or various ownership interests) are transferred between the originator of the loan (the P2P Lending company) and the individual “P2P Lender” (more info here).

It is unclear whether LendingClub has ceased operations as a result of an SEC action or whether LendingClub has chosen to bite the bullet and submit to regulation voluntarily. This event could have major repercussions for other P2P Lenders in the US with similar business models.

I received the following email which contains slightly more information than what was available in the onsite notification:

—

Dear (Peer-Lend),

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes.

The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club.

Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

Q&A:

Q1. What about money I have begun moving, but is still in transit to Lending Club?
A1.1. If you are in the process of verifying your bank account, you will be able to complete that verification but will not be able to add new funds
A1.2 If you have initiated a transfer, the funds will be displayed in your Lending Club account balance as soon as those funds are available.
A1.3 If you have uncommitted funds, you may request that Lending Club return those funds via the same method used to load the funds. For example,
• If you have initiated an ACH to add funds, these funds will be transferred into your Lending Club account but you will not be able to lend these funds out. You can go into your Lending Club account once the ACH transfer has been completed and withdraw funds back into your linked bank account..
• If you’ve wired funds into your Lending Club account and have not yet committed these funds into loans, you can send a request to support@lendingclub.com for us to wire these funds back to you at no charge.
• If you’ve sent funds by check, and have not yet committed these funds into loans, you can send a request to support@lendingclub.com for us to send you a check by mail for the same amount at no charge.

Q2. What about referrals?
A2.1 The current referral program is terminated. If you have referred someone who has already signed up as a lender or a borrower, or if you have been referred by someone and have already signed up as a lender or a borrower, you will be receiving your referral payment within the next few days.

Sincerely,

Patrick Gannon
Senior Vice President
Lending Club
440 N Wolfe Road
Sunnyvale CA 94085
www.lendingclub.com