Lending Club Scam: Are Prosper and Lending Club Legitimate Companies?

When any company comes forth claiming to offer a new product or service that’s more competitive than its predecessors, consumers quite often look with skepticism, especially in the financial services industry. Many companies have purported to offer new asset classes of investments claiming higher than average rates of return and many of those investments have either turned out to lose investors money or turn out to be scams all together.

When peer-to-peer lending companies first came onto the scene in 2006 and 2007, many looked with skepticism. Prosper and Lending Club were essentially setting up investments without the oversight of the Securities and Exchange Commission (SEC). At the time, Lending Club and Prosper said what they were doing was completely legal because they were only acting as a facilitator between borrowers and lenders setting up loans. The Securities and Exchange Commission disagreed.

Eventually, the SEC filed suit against Prosper and Lending Club for selling unlicensed securities in violation of the Securities Act of 1933. Both Prosper and Lending Club went dark while they dealt with their legal issues. After a several months, both companies settled with the SEC and agreed to register their investments with the SEC. Since then, both companies have completed their SEC registration and have each filed a prospectus.

Although both companies did have some issues with the SEC, the idea of peer-to-peer lending is a perfectly legitimate concept that both Prosper and Lending Club are now legally practicing. From a legal perspective Lending Club and Prosper.com are not a “scam.”

Some of Prosper.com’s early investors have ended up getting lower than expected rates of returns and some have even lost money on their investments, but that’s more a result of investors bidding too low of interest rates and higher than expected default rates than any failure on the part of Prosper. Investors on Lending Club have fared better than their competitors on Prosper so far.

There are some long term questions about the viability of peer-to-peer lending because of the relatively high default rates that investors are seeing, but some of that may be a result of the industry perfecting who it should originate loans to.

At the end of the day, both Lending Club and Prosper are offering legitimate lending services that are regulated by the U.S. government.