r/borrow depends on 10 somewhat overworked volunteer moderators, who are tasked with identifying scammers and predatory lenders, enforcing posting protocol, and maintaining LoansBot. The moderators’ oversight is important, but they can only do so much to ensure loans are paid back. The moderator we talked to said that he has banned some “nakedly predatory” lenders, who were demanding interest payments that exceeded 100 percent.
If a loan falls through, it’s often difficult for lenders to recoup their loss. Some r/borrow lenders have been known to contact a borrower’s friends and family through Facebook. In some cases the relatives of users who default on a loan have wound up repaying on their behalf.
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.
“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.