Can Peer to Peer Lending End the Credit Crunch?

Crossposted from FastCompany.com, where I've been blogging like crazy this past week and have been too busy to post over here. I'll get back to it momentarily.

Credit card companies are canceling your account . Student loans, home mortgages, and auto loans are all getting harder to obtain, and the big bank where I have an account is insolvent; how about yours?

Starting today, a range of next-generation financial services companies, all of whom employ technology in innovative ways, have teamed up to market some much-needed help to consumers with the Uncrunch America campaign. Like a team of of financial Superfriends, Lending Club offers personal loans through a peer-to-peer model, Virgin Money (yes, a pro-social for-profit offshoot of the Branson empire) has peer-to-peer mortgage financing, OnDeck Capital offers small business loans with a proprietary holistic scoring model, CreditKarma has credit score tools, and Geezeo offers personal finance and budgeting tools.Since the beginning of the year, UnCrunch members have lent almost $75 million to each other.

The site has an overwhelmingly grassroots, patriotic feeling and look, as though it were a stray page from MoveOn.org or recovery.gov. "The American people will solve the credit crisis by helping each other," it proclaims.

Does this fine-sounding premise hold up? Peer-to-peer lending is one of the oldest ideas in finance. In its online incarnation, it doesn't have anything like the volume yet to fill the trillion-dollar gap in the consumer credit market. But it does offer an intriguing alternative to the standard profit-happy credit model, and it's been spreading as a close cousin of the microfinance or social lending movement. As a niche both for borrowers shut out of the credit market and for investors looking for a better return than the stock market can offer, it's likely to grow.

via Uncrunch America

Brian Lehrer Show--Your Questions, 2/19

Hi everybody, thanks for listening!

[3] sophie from manhattan:
Chapter 11 bankruptcy is for businesses. Chapter 7 and 13 are for individuals. If you earn more than the median income in your state, it may be difficult to declare Chapter 7 and fully discharge debt. You may have to negotiate a payment plan instead under Chapter 13. You need to pay a fee, typically $300, and find a lawyer who will help you file, and appear in court. Also, bankruptcy typically stays on your credit report for 10 years--not 7.

[4] John Eiche from Queens: Yes, the mortgage plan is targeted to help people who are paying more than 43 percent of income on the mortgage.

[5] Tony from San Jose, CA: Yes, they could close it, more likely is that they would lower your credit limit or send you increasing solicitations to charge more (like a "cash advance" check). You might want to apply for another card if you are worried about it.

[6] Scott from Cambridge, MA: Yes, go to annualcreditreport.com to get an idea of your credit record before you take out loans.

[7] Mike from Long Island: That sounds screwy because 783 is a very high score. Maybe you should get your other 2 credit scores (Experian and Equifax) as well as your credit report and see if they agree. If not you may need to correct some errors on your report.

[8] FranciL from NYC: Yes, might as well keep it open. The amount of available credit is part of your credit score; so is the length of your credit history, which may be affected if this extra card was opened before your other cards.

[9] Edward from NJ: Frustrating! But I don't think this should affect your credit score. What could ding it was if you were shopping around for a home equity loan and made a lot of loan applications at the same time.

10] Suki from Williamsburg: It sounds like you have a healthy attitude towards credit, but I dont understand why you would have a bad credit score if you are paying off the card on time every month. It could be because you are maxing out the one card or you just don't have a long enough credit history. If the former is true, it may not be a bad idea to open another card. Or just stick to cash!

[11] C from Manhattan, NY: I am a fan and a member of Mint.com. They make money by referring customers to bank products (the Ways to Save section)--these offers are vetted to make sure they are really saving you money, but it is a paid product placement. The rest of their information is very reliable and they have been free of security concerns so far. I think it's a good tool.

Listen Live to the Brian Lehrer Show

Going on at 10:40 am. You can listen here. Afterwards, I'll respond to questions on my blog.

Local Help for Money Woes

A couple of weeks ago I taped an interview with "It's the Economy, NY" on channel 13, the local PBS station in New York City. I think it's supposed to air tomorrow night. The show can be viewed online and I'll post the video as soon as it comes up. Their site has a useful list of links to local resources to help with money problems.

Economic Avengers

You can volunteer with Home Defenders, run by Acorn, to commit civil disobedience when the sheriff shows up to evict people who face foreclosure.

“This is a desperate, last-ditch effort by folks who are working two or three jobs, single mothers, elderly people who don’t know what else to do to save their homes,” said Ginny Goldman, Acorn’s lead organizer in Texas, where the campaign began in Houston on Saturday.

Brian Lehrer Show: Your Questions

Read all comments here.

Diane from Long Island: With Sallie Mae Signature loans--private student loans--consolidation doesn't necessarily help to lower interest rates. For the public, federal portion of your son's loans he may be eligible for Income Based Repayment: look at ibrinfo.org for more info.
I am not sure the full extent of your negotiations with Sallie Mae but they say that they offer both graduated and extended repayment--both of these would lower the monthly load, although they would not lower the interest rate. The National Consumer Law Center has a list of lender ombudsmen--these are the people with the most power to help you negotiate a solution.

Sam: If you can register with a state employment agency and document that you are looking for a full time job, you should be able to qualify for unemployment deferment
whether or not you're eligible for benefits.

Darren from Brooklyn: Consolidation won't necessarily lower your interest rate on private student loans. The exception is if you can improve your credit score significantly (by 50-100 points) you might be able to get better terms. I would concentrate on seeking income based repayment, deferment or another solution to make it easier to manage your federal student loans, and just keep paying off the private loans on time to build up your credit score. Also, I have to ask you to reconsider going back to school. You already have enough debt for a lifetime.

katie from brooklyn, ny: shouldn't the higher likelihood of securing a job factor into the decision to pursue higher degrees, since a moderately paying job is better than no job at all?

Depending on the job, there are cheaper ways of improving your job prospects: get relevant experience by interning or volunteering. Travel to enhance your language and cultural skills, or even seek a job overseas (Dubai is popular these days). Or even take a single targeted course to improve your skills in a specific area ( software programming, statistics, or LEED AP certification to name a few).


Clem from Brooklyn Whatever happened with the investigation into the conspiracy between NELnet and countless college loan officers to steer students toward higher interest loans, and how do you combat that as a borrower in these times?

Some lenders went out of business, and lenders in general had their subsidies lowered. You are free to search beyond your school's preferred lender list if you are worried about the relationship between your college financial aid offices and certain lenders.

Christina from Brooklyn February 11, 2009 - 10:58AM What do you consider a minimum manageable amount of debt for a student getting a PhD in a social science or a discipline in the humanities? Is there is a number you can cite where it's simply not manageable?

I wrote a column on this question back in '07. According to the U.S. Census Bureau, the payoff from social science and liberal arts master's degrees is actually negative -- the average liberal arts MA earns less than the average of all BAs.And according to an in-depth study conducted back in 1999, those with Ph.D.s in the humanities had the highest debt and lowest income of all students in all disciplines.

That said, I think a debt amount roughly equal to your starting salary -- 35K or so--is relatively reasonable.

Alaina from Weehawken: It is indeed very difficult to discharge these loans in bankruptcy, but not impossible. Your mom being a little older is helpful. You might be able to find legal assistance here. Good luck.

Frank from Westchester: PLUS loans are meant to be up to the cost of attendance.Your credit score has more bearing on your eligibility than the overall amount of the loan. However it's not a bad idea to have your son take out his due amount of federal FFEL loans as well.

Student Loans on Brian Lehrer

listen here.

I really like this comment (Nick from NYC):

People carrying these huge education debts are "frozen", just like credit, in that they aren't free to be mobile, innovate, make purchases, all of those things that will generate economic activity.

If the solution continues to pretend not to see both the huge hidden load of student debt and credit card debt, there will continue to be a rotten core to the economy.Perhaps, like in ancient times, we need an imperial decree that all debts are cancelled, and we start from the year zero.

MyRichUncle is Out of Cash

crossposted from FastCompany.com )

MyRichUncle was an intriguing startup student loan company with an innovative, white-knight approach when I wrote about them in the 2006 Fast Company 50.

When I talked to them, the two 20something founders seemed cocky, but sincere. They believed they could bypass the punitive terms and high-pressure sales tactics used by other student lenders in favor of better analytics to predict students' chances of repayment, and that they could build customer loyalty through transparency. They gained a higher profile in 2007 when they took out a full page ad in the New York Times to publicize the shady collusion between college financial aid officers and other student loan companies. Lenders like Sallie Mae often offered colleges kickbacks and sweeteners in exchange for inclusion on "preferred lender" lists. The ad campaign helped fuel a large-scale investigation into these practices by New York State Attorney General Andrew Cuomo, which led in turn to some federal policy crackdowns, including subsidy cuts to lenders.

But the student loan market today looks very different than it did in 2007 when it was seeing 27 percent annual growth. In fact, there's a looming crisis.

Throughout those years of growth, federal and private student loans were heavily repackaged and securitized just like home loans and credit card debt. So in the face of the credit crisis, 168 lenders have pulled out of the program. So-called "subprime students," typically at community and for-profit schools, are having trouble getting federal or private student loans, and all students are seeing fewer discounts on loans. More student loan defaults may be looming as the economy sheds jobs. And the Treasury Department and Federal Reserve have quietly authorized up to a $260 billion bailout for the student loan industry, separate from the $700 billion bailout we've all heard so much about.

MyRichUncle won't be seeing any of that money. They had had trouble raising capital as the market got tighter, had stopped making new loans, and today, declared bankruptcy. As if they didn't have enough trouble, it came out in December that one of their former employees allegedly embezzled $2.3 million from their accounts. Troy Hill, of Jersey City, blew much of the cash on several Mercedes, bling from Jacob the Jeweler, and two coffeehouse franchises.

The student loan market is definitely not getting any more clean or transparent in this atmosphere of scarcity and panic. In this environment, it's a tough time to be the nice guys.

"The Economy's Getting Smaller"

For good.
Asset deflation, consumer spending, retail stores, autos, Wall Street, media, pharmaceuticals.

"What is the sum total of all this? The US GDP will contract 4-6% 2008 Q4 - 2009 Q2; Down 1-3% for the second half 2009; And is possibly flat in 2010 –Back in 2001, we had forecast the US Economy could hit $15 Trillion by 2010-11; That now gets pushed back to 2015-17 . . ."

Southern NH U: Not As Awesome, But Cheap

One reader of my Times piece last week brought this to my attention: a much cheaper, no frills satellite campus of a private college.

Innovative, yes. Yet students are missing out on the social benefits of the pastoral main campus.
On the other hand, maybe they don't have to work 3 jobs and have time for a social life in the first place.

Cooper Union: Awesome and Free

Cooper Union college is going to become far more selective than Harvard next year--applications have surged 70 percent.
Not only do they offer a downtown Manhattan location and excellent courses of study (many of which connect to good jobs in creative fields like engineering, architecture, and design), they are committed to full scholarships for every student.

Interestingly, Cooper Union's not any richer than, say, Amherst. They ran huge deficits just a few years ago and now stand at $608 million. There are dozens of colleges with bigger endowments. Free tuition is just a tradition at Cooper Union.

Colleges that want the best students might consider how they might rearrange their resources to drastically cut or even eliminate tuition.

Brian Lehrer Show Questions: Bankruptcy, Credit Card Offers, More

You can listen here.

lucy from brooklyn February 05, 2009 - 10:47AM when should one seriously consider bankruptcy?

There's no litmus test. Generally it's indicated if you have high unsecured debt (medical bills, credit cards, utility bills) and assets to protect (like a car, savings account, or wages that could be garnished). There is also an income test to declare complete (Chapter 7) bankruptcy.
Bankruptcy can't get rid of student loans and you may still lose your house or your car. It affects your credit for 7 to 10 years. Also, you can't declare bankruptcy again for 6 years.
A bankruptcy lawyer would be more likely to advise bankruptcy if your money problems come from one-time bad luck like a divorce or medical problems, and not from years of poor spending habits.

[12] Matthew from Manhattan February 05, 2009 - 10:50AM Is there one credit card she can recommend applying to now?
I can't recommend a specific one but you could try creditcards.com or bankrate.com. You might also look into products offered by credit unions which are nonprofit community financial institutions.

16] Chris from Putnam county February 05, 2009 - 10:52AM I haven't paid interest in years via the 0% offers. Is this a bad idea for any reason?
Congrats. The only problem I can think of is if you apply for a bunch of new cards in a short period of time it could lower your credit score. Check out your report at annualcreditreport.com

17] Christine from Brooklyn, NY February 05, 2009 - 10:52AM I have heard that you can negotiate lowering finance rates with credit card companies. How low can you realistically get them to go? If you negotiate it once, can you try again later?
The best would be if you have a competing 0% offer in hand and you can threaten to switch your balance over. There are lots of forums and online resources for negotiating with credit card companies. I don't see why they wouldn't renegotiate as long as you have been sticking to the terms of the original deal.

[18] Darren from Brooklyn February 05, 2009 - 10:52AM How closely should I be watching Citibank to see if they are playing around with my terms, billing cycle, etc.? Also, I am planning on using my tax return to pay off the credit card, seems like a good idea, right?

If you use a free service like Mint.com they can send you text messages when you're charged a fee, or tell you how much you're paying in interest on your credit cards.
Yes, I think that paying off your card with a tax refund is a great idea! It's like instantly earning 15%.

The Mortgage Crisis In 10 Panels

This is soo going in my PowerPoint for colleges. Click here to buy Ruben Bolling's book.

Credit Card Delinquencies at Record High

Crazy things going on with peoples' budgets these days. Spending is down (which is hurting the economy). The savings rate is up. Personal income is down. And late payments on credit cards are at an all-time high.

People are finally trying to do the smart thing with their money, but they don't have enough money to do the smart thing with it.

Meanwhile, a Credit Cardholder's Bill of Rights is before Congress. It passed the House in September
and would prohibit actions like:

--Applying unfair interest rate hikes retroactively to balances incurred under the old rate;
--Assessing hidden and unjustified interest charges on balances already paid off;
--Piling on the debt that consumers owe by requiring them to pay off balances with lower
interest rates before those with higher rates;
--Charging late fees even though consumers mail their payments seven days in advance of
the due date; and
--Charging excessive upfront fees to subprime cards targeted at consumers with blemished
credit histories.

Check out the Brian Lehrer Show Tomorrow

Photo: flickr
I'll be on from 10:40--11am. It's the first of four weekly slots I'll be doing throughout the month of February.
Also, they've had some great coverage of the local economy lately:
Uncommon Economic Indicators (a likely homage to Planet Money's similar feature)
and a bunch of interviews under the tag "jobless".